Answer:
Since the total present value of Option 2 of – $1,453,892 is lower than the total present value of Option 1 of – $1,620,094, it implies that Option 2 costs less and more attractive at the company’s MARR of 20% per year than Option 1. Therefore, Option 2 should be selected.
Explanation:
Note: See the attached excel file for the calculation of the total present values (in bold red color) of the two alternatives for expanding international export capacity.
Present worth can be described as an equivalence method of analysis in which the cash flows of an investment or a project are discounted to a single present value.
From the attached excel file, we have:
Total present value of Option 1 = – $1,620,094
Total present value of Option 2 = – $1,453,892
Since the total present value of Option 2 of – $1,453,892 is lower than the total present value of Option 1 of – $1,620,094, it implies that Option 2 costs less and more attractive at the company’s MARR of 20% per year than Option 1. Therefore, Option 2 should be selected.
