Question

2) Two mutually exclusive design alternatives are being considered, with each one having a useful life of 10 years. The estimated sales and cost data for each alternative are shown. Annual revenues are based on the number of units sold and the selling price. Annual expenses are based on the fixed and variable costs. If the MARR is 20% per year, determine which alternative is preferable based on the PW Method. 12 Investment cost Units to be sold each year Selling price Variable cost Annual expenses (fixed) Market value А $60,000 20,000 $4.40/unit $1.40/unit $30,000 $10.000 в $40,000 18,000 $3.70/unit $0.90/unit $25,000 Sann

Answer 1

Calculation Of Annual Operating Cash Flow A В 20000 18000 Units to be Sold a 4.40 S b Salling Price 3.70 Variable Cost Per Unit 1.40 S 0.90 C Contribution Per Unit (b-c) 3.00 S d 2.80 60,000 S 30,000 S Contribution Margin (3 a) 50,400 e Fixed Expenes f 25,000 Operating Cash Flow (e-f) 30,000 S 25,400 Calculation Of Present Worth Of Project А В Annual Cash Flow 30000 25400 a PVA Factor 20 % , 10 year b 4.19247 4.19247 Present Value Of Cash Flow (a b) 125774.16 106488.79 C Market Value (10th Year) d 10000 9000 PV Factor 20 % , 10 year 0.16151 0.16151 Present Value Of Salvage Value (d*e) f 1615.06 1453.55 Initial Investment 60000 40000 Net Present Value (c+f-g) h 67389.22 67942.34 Alternative B will be accepted, because of higher NPV.