Question

Three mutually exclusive design alternatives are being considered. The estimated sales and cost data for A B C Investment cost $30,000 $60,000 $50,000 Estimated units 15,000 20,000 18,000 to be sold/year Unit selling price, $3.50 $4.40 $4.10 $/unit Variable costs, $1.00 $1.40 $1.15 $/unit Annual expenses $15,000 $30,000 $26,000 (fixed) Market value 0 $20,000 $15,000 Useful life 10 years 10 years 10 years 306 CHAPTER 6 / COMPARISON AND SELECTION AMONG ALTERNATIVES each alternative are given on p. 305. The MARR is 20% per year. Annual revenues are based on the number of units sold and the selling price. Annual expenses are based on fixed and variable costs. Determine which selection is preferable based on AW. State your assumptions. (6.4)

Answer 1

Answer:

Alternative B has a higher annual worth          

Explanation:

project                              A                     B                     C

initial outlay               $30,000         $60,000        $50,000

units sold                     15,000            20,000           18,000

selling price                 $3.50               $4.40             $4.10

var. costs                        $1                   $1.40              $1.15

fixed expenses          $15,000          $30,000        $26,000

salvage value                $0               $20,000         $15,000

useful life                   10 years          10 years          10 years

contribution                $2.50               $3                   $2.95

margin per unit

NCF 1 - 9                    $22,500         $30,000         $27,100

NCF 10                       $22,500         $50,000         $42,100

annual worth A = [-$30,000 x .2385 (A/P, 20%, 10 years)] + $22,500 = $15,345

annual worth B = [-$60,000 x .2385 (A/P, 20%, 10 years)] + $30,000 + [$20,000 x .0385 (A/F, 20%, 10 years) = $16,460

annual worth C = [-$50,000 x .2385 (A/P, 20%, 10 years)] + $26,000 + [$15,000 x .0385 (A/F, 20%, 10 years) = $14,652.50