Question

You have been asked to evaluate these three mutually exclusive alternatives each with a different useful life. Your company's MARR is 20% $100,000 Project Initial Cost Annual Benefit Annual Cost Useful life $140,000 $75,000 $6,500 4 years $125,000 $60,000 $6,000 6 Years $4,000 3 years 1. Assuming repeatability, which project would you choose? 2. Using a study period of 6 years, find the FW of each project by extend both project A and B to the EOY 6 at MARR. Which project would you choose? 3. Project A could be extended an additional year with an additional cost of $50,000 payable EOY 3 with expected revenue of $65,000 at EOY 4. Project C could be terminated at EOY 4 with all its assets sold resulting in a positive cash flow of $50,000. Based on these assumptions which project would you recommend and why?

Answer 1

Statement for the calculation of Annual Cash flow
Annual revenue	25,000	35,000	30,000
Less Annual expenses	4,000	6,500	6,000
Operating income	21,000	28,500	24,000
Add Depreciation expenses	33,333	35,000	20,833
Annual cashflow	54,333	63,500	44,833

			Project A		Project B		Project C
Particular	Time	PVF@15%	Amount	PV	Amount	PV	Amount	PV
Cash outflow			100,000	100,000	140,000	140,000	125,000	125,000
Present value of cash outflow				100,000		140,000		125,000
Cash inflow
	(1-3)	2.2832	55,433	79912
	(1-4)	2.8549			35,000	99921.5
	(1-6)	3.7845					44,833	169670.5
Present value of cash inflow				79912		99921.5		169670.5
Net present value				-20,088		-40,079		44,670

So from all of the above Project C is best as it has positive and maximum Net present value.