Question

engineering economy

QUESTION 2 The following mutually exclusive investment alternatives have been presented to you A B C E Capital investment $60,000 $90,000 $40,000 $30,000 $70,000 Annual expenses $30,000 $40,000 $25,000 $15,000 $35,000 Annual revenues $50,000 $52,000 $38,000 $28,000 $45,000 MV at EOY 10 $15,000 $15,000 $10,000 $10,000 $15,000 IRR 31.5 % 7.4 % 30.8 % 42.5 % 9.2 % The life span of all alternatives is 10 years.. Using a MARR of 15 % per year, what is the preferred alternative? (Choose the one best answer from the choices given below.) a. Do nothing b. Alternative A C. Alternative B d. Alternative C e. Alternative D f. Alternative E

Answer 1

Alternative B and E are eliminated since its IRR is less than the MARR of the company.

Assuming sufficient funds are available for the company at any point of time for capital investment, and there are no other investing opportunities available.

Since, no other investing opportunities are available, the company should invest in such alternative which maximizes its Net Present Value (NPV).

D A c Annual Income 50,000 $ 38,000 $ 28,000 ) Annual Expense -30,000 $ -25,000 $ -15,000 Cash Inflow p.a 20,000 $ 13,000 $ 13,000 PVAF (15%, 10 years) 5.0188 5.0188 5.0188 $ 1,00,376 $ 65,244 $ 65,244 DCF Terminal inflow 15,000 $ 10,000 $ 10,000 PVIF (15%, 10th year) 0.2472 0.2472 0.2472 PV of terminal $ 3,708 $ 2,472 $ 2,472 $ Total DCF 1,04,084 $ 67,716 67,716 -40,000 $ ) Capital Investment -60,000 $ -30,000 $ NPV 44,084 $ 27,716 $ 37,716

Alternative A provides maximum NPV.
Hence, answer for this question is Option b - Alternative A.