Question

1-4. A contractor is considering the following three alternatives: A. Purchase a new microcomputer system for $5,017. The system is expected to last for 6 years with a salvage value of $1,000 last 6 years. essentially no salvage value. B. Lease a new microcomputer system for $1.020per year. payable in advance. It should C. Purchase a used microcomputer system for $2,720. It is expected to last 3 years with (a) For a MARR of 2%, which alternative should be selected? (b) For a MARR of 15%, which alternative should be selected? Approach 1. Truncate (cut off) the longer-lived altermative(s) to equal the shorter lived alternative and assume a salvage value for the unused portion of the longer- lived alternative(s). Then make the comparison on the basis of equal lives. Approach 2. Assume equal replacement conditions (costs and incomes) for each alter- native and compute the discounted present worth on the basis of the least common multiple of lives for all alternatives. 1. Explain the meaning of MARR. 2 For (a.), use Approach 1 3. For (b.), use Approach 2 4. For each alternative, one at a time, first draw a cash flow diagram; then, calculate the NPV. Set up a formula for each NPV. Use equations for each PV factor of the formula. After colculating the NPV for each alternative A, B and C, explain which alternative should be selected for each of (a.) and (b.J 5.

please complete questions 3-5 as I completed the first two and confused on the rest. please show all work and please complete the problem! thanks!!

Answer 1

Ans 3. for (b) as per Approach 2 the solution is that Alternative 1 should be selected as it is giving highest cash flow on comparable cost basis. The assumptions i have taken is Discount Rate=MARR. The workings of my solution is on excel which i have pasted as under:-

Sol for NPV:

Time	Scenario A						Scenario B						Scenario C
	Cash Flows	DCF @ 12%	PV @12%	Cash Flows	DCF @ 15%	PV @15%	Cash Flows	DCF @ 12%	PV @12%	Cash Flows	DCF @ 15%	PV @15%	Cash Flows	DCF @ 12%	PV @12%	Cash Flows	DCF @ 15%	PV @15%
0	-5017	1	-5017	-5017	1	-5017	122	1	122	153	1	153	-2720	1	-2720	-2720	1	-2720
1	1272	0.893	1135.304	1422	0.870	1237	122	0.893	109	153	0.870	133	1233	0.893	1101	1315	0.87	1144
2	1272	0.797	1013.664	1422	0.756	1075	122	0.797	98	153	0.756	116	1233	0.797	983	1315	0.756	994
3	1272	0.712	905.057	1422	0.658	935	122	0.712	87	153	0.658	101	1233	0.712	878	1315	0.658	865
4	1272	0.636	808.087	1422	0.572	813	122	0.636	78	153	0.572	87
5	1272	0.567	721.506	1422	0.497	707	122	0.567	69	153	0.497	76
6	2272	0.507	1150.833	2422	0.432	1047	0		0
			717.450		3.784	797			564		3.352	666			242		2.284	283
			NPV		Total Discount Factor	NPV			NPV		Total Discount Factor	NPV			NPV	Total Net Cash Inflow	Total Discount Factor	NPV
			Net Cash Flow on Common Cost factor =797/3.784						Net Cash Flow on Common Cost factor =666/3.352						Net Cash Flow on Common Cost factor =283/2.284
				211						199						124
	Depreciation		Salvage Value		Depreciation		Depreciation			Depreciation			Depreciation			Depreciation
	669.5				669.5		0			0			907			907
	Return		1000		Return		Return			Return			Return			Return
	602.04				752.55		1142.4			1173			326.4			408
	Scenario A	Scenario B	Scenario C
	NPV	NPV	NPV
12%	717.45	564	242
15%	797	666	283