Question

41. Evaluating Alternative Investments. Washington Brewery has two independent investment opportunities to purchase brewing equipment so the company can meet growing customer demand. The first option (equipment A) requires an initial investment of $230,000 for equipment with an expected life of 5 years and a salvage value of $20,000. The second option (equipment

B) requires an initial investment of $120,000 for equipment with an expected life of 4 years and a salvage value of $15,000. The company’s required rate of return is 10 percent. Additional cash flow information for each investment is provided as follows.

Year 1 Year 2 Year 3 Year 4 Year 5

Equipment A

Utility savings $ 12,000 $ 14,000 $ 15,000 $ 16,000 $ 17,000

Additional revenue 45,000 48,000 50,000 55,000 60,000

Maintenance costs (5,000) (8,000) (10,000) (13,000) (16,000)

Equipment B

Utility savings $8,000 $9,000 $10,000 $10,000 -

Additional revenue 35,000 36,000 38,000 42,000 -

Maintenance costs (6,000) (8,000) (9,000) (11,000) -

Answer 1