Question

19. Greengrass incorporated (GI) is updating its Weed and Grass Chemical Quality control equipment and is considering the sponsorship of a NASCAR team. As the lead Test Engineering manager, you have to select the best option for the product line control equipment. Your team has researched the market and found four options but only the three below will meet the technical needs of the company. The company as a 6 year contract and needs the equipment for all 6 years. The financial manager has told you that you need to consider a discount rate of 10% to meet company ROI guidelines. You are not given any product profit and quantity information, since that is company confidential and held at very high levels in the company. So you can only make your decision on your cash flow/discount analysis. Based on discussions with senior management in your division you have decided to use a present-worth criterion to make your recommendation. The options are shown below; pick the best option for the Company and be sure to justify your recommendation. Option Initial Investment Useful Life Salvage Value $100,000 $150,000 $10,000 $30,000 4 Years 6 Years N/A---Annual Lease Annual Maintenance Costs $65,000 $57,500 $120,000

Answer 1

option - A It is initial investment = $1,00,000 Salvage value = $10000 annuel maintenance cost = $65000 useful life = 4 yearl. It is clearly given that the company as a 6 year contract &e needs the earuipment for all 6 years. But in option; A, the earuipment has useful life of only 4 years which is ress than reanised. Therefore option: A is rejected. option; 'B year cash flow PVF @ 10%) discounted Cash flow ($ 150,000) ($150,000) ($57500) 4.354 0,355) $30000 0-564 $16.920 Total present value (Cost) ($383, 435)

option; c discounted Cash out flow 999 cash flow ($ 120,000) Part @ 10%,64) 4.354 ($522,480). 1-6 :: Total Net cash out flow option B= $383435 - option c= $ 522 480. is .: since less present value of net cash out flow under option iB, it is preferable to adopt option: B