Question

NOTE: Ignore any instructions in the problem statements to use spreadsheets or financial calculators.

Answer 1

4.62)

Net present value = Present value of future benefits - Initial investment.

Present value of future benefits = Future value * present value annuity factor

Present value annuity factor = 1 / ( 1+ MARR)^{number of years}

For first year = 1/ ( 1+ .10)¹ = 0.909

For Second year = 1 / ( 1+ .10)^{2 =} 0.826........as so on till life of the project and then add all the factors

Calculation showing present value of different project
Vendor	Initial Investment ($)	Life years	Annual net revenue per year ($)	Present value Annuity factor	Present value	Net present value
A	1500000	8	360000	5.335	1920600	420600
B	3000000	10	600000	6.145	3687000	687000
C	1800000	5	620000	3.791	2350420	550420
D	2000000	4	630000	3.170	1997100	-2900

a) A maximum of 4 million can be spend

Project with higher NPV will be selected first and then project with comparatively lower NPV.

= Here Vendor A and C will be selected Since the total of NPV of those vendor investment is higher than any other combination = NPV is $971020 in the spending of $3.3 million.

b) Spending of 5.5 million but no longer than two vendor is allowed.

Vendor B and C will be selected since their total NPV is highest ( $1237420) with the total spending of 4.8 million.

c) There is no limit on spending.

If there is no limit on spending all the Vendor with the positive NPV will be selected .Vendor A .B, C will be selected.