Question

Question 4 An American multinational company is now considering two mutually exclusive alternatives for the environmental protection equipment at its manufacturing plant in the United Kingdom. One of these alternatives must be selected. The estimated cash flows for each alternative are listed in the below table. Alternative A Alternative B Capital investment Annual expenses Market value at end of useful life Useful life £(20,000 + D8 x 1,000) £(5,500 + D8 x 1,000) £(1,000+ D8 x 1,000) 5 years £(38,000 + D8 x 1,000) £(4,000 + D8 x 1,000) £(4,200 + D8 x 1,000) 10 years Assume that the equipment will be needed indefinitely and the firm's MARR relative to British pound (GBP) is 20% per year.

where D8 is equal to 4

Answer 1

1. As equipment is used indefinitely and study period is common multiple of alternatives therefore we will apply Repeatability assumption.

2. In question put D8 = 4, you will get below table.

Particulars	Alternative A	Alternative B
Capital Investment	24,000	42,000
Annual Expenses	9,500	8,000
Market Value at end of Useful life	5,000	8,200
Useful Life	5	10

Present worth of Alternative A 24000 - (24000 -5000) CPIF, 5, 2001.) + 500oCPIF,10,20) -9500 (PIA, 10, 20*1.) - 70,656.63 Present worth of Alternative B -42000 do0oC PIA, 10,20%) + 8200(f1f.10,20*2) -74,215.43 Therefore Alternative A in better resulting in les outflows.

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