Question

Two computer systems are being sold for your parent SSOK initially and need to be updated every yea r four y four. System DELL COS 565K and requires no additional life, irrespective of the systems for which based on Rate of Return method (ROR) mingan our-year project. System SUNG cost of 6.6 K per yen y e a. Draw the cash flow diagrams (clearly) for the alternatives prod YA Which alternative should be selected assuming an MARR of 10%-25 point e for the alternatives (3 points) Complete the cash flow table & the differential cash flow (5 points) et All SUN Alt. DELL Differential cash flow (ACE c. Differential cash flow diagram (draw clearly) (3 points) c. Calculate ROR (10 points) d. Selection criteria (3 points) e. Decision - Choose Alt. (1 point)

Answer 1

Ans:

a. Cash flows diagram for the given alternatives are as follows:

Cash Outflow each year	Alt. Sun	Alt. Dell
Initial Outflow	$50,000	$65,000
Year 1	$6,600	Nil
Year 2	$6,600	Nil
Year 3	$6,600	Nil
Year 4	Nil	Nil
Total Cash Outflow	$69,800	$65,000

b. Calculation of Differential Cash flow:

Cash Outflow each year	Alt. Sun	Alt. Dell	Differential Cash outflow (Sun-Dell)
Initial Outflow	$50,000	$65,000	($15,000)
Year 1	$6,600	Nil	$6,600
Year 2	$6,600	Nil	$6,600
Year 3	$6,600	Nil	$6,600
Year 4	Nil	Nil	Nil

c. Differential cash flow diagram:

Cash Outflow each year	Differential Cash outflow
Initial Outflow	($15,000)
Year 1	$6,600
Year 2	$6,600
Year 3	$6,600
Year 4	Nil
Net additional outflow for Alt. Sun	$4,800

d. Working for calculation of present value of net outflow for each project based on given Marginal ROR (10%):

Cash Outflow each year	Alt. Sun	Present Value at 10% (Alt. Sun)	Alt. Dell	Present Value at 10% (Alt. Dell)
Initial Outflow	$50,000	$50,000	$65,000	$65,000
Year 1	$6,600	$6,000 [(1/1.10)*6600]	Nil	Nil
Year 2	$6,600	$5,455 [(1/1.102)*6600]	Nil	Nil
Year 3	$6,600	$4,859 [(1/1.103)*6600]	Nil	Nil
Year 4	Nil	Nil	Nil	Nil
Present value of Total Cash Outflow		$66,314		$65,000

e. Based on above we can decide that project Dell is more beneficial for the project at 10% marginal Rate of Return.

f. Alt. Dell is chosen.