Question

.The Dessert Company must replace a freezer and is trying to decide between two alternatives, their cost of capital is 10% and the project life is 12 years: (50 points)

	Freezer A	PV Factor	Present Value	Freezer B	Present Value
Investment Required	$14,500			$12,800
Annual Electrical Bill	$1,900			$2400
Salvage value	$4,000			$3,000
Total Cost for 12 years

Which investment provides LJB with the lowest total cost?

Answer 1

	Freezer A (1)	PV Factor (2)	Present Value (1)*(2)	Freezer B (3)	Present Value (2)*(3)
Investment Required (1)	$14,500	1	$14,500	$12,800	$12,800
Annual Electrical Bill (2)	$1,900	6.8137	$12,946	$2,400	$16,353
Salvage value (3)	$4,000	0.3186	$1,274	$3,000	$956
Total Cost for 12 years (1)+(2)-(3)			$26,172		$28,197

PVIFA(10%,12) = 6.8137

PVIF(10%,12) = 0.3186

Conclusion:

Investment in Freezer - A provides LJB with the lowest total cost. i.e. $26,172 as compared to $28,197.