Question

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a...

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 12% discount rate.

Option 1 Option 2
Equipment purchase and installation $70,200 $82,120
Annual cash flow $28,600 $31,070
Equipment overhaul in year 3 $4,810 -
Equipment overhaul in year 5 - $6,250

Calculate the net present value of the two opportunities. (Round present value factor calculations to 4 decimal places, e.g. 1.2514 and the final answers to 0 decimal places, e.g. 59,991.)

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Homework Answers

Answer #1

Answre- The net present value- Option 1 = $87972.

Explanation-

BILL ZIMMERMAN
Net Present Value (OPTION 1)
Particulars Cash Flows Present Value Factor @12% Present value
(a) (b) (c=a*b)
$ $
Equipment purchase & installation -70200 1 -70200
Annual cash inflow (10 years) 28600 5.6502 161596
Equipment overhaul in year 3 -4810 0.7118 -3424
Net Present Value $ 87972

The net present value- Option 2 = $89885.

Explanation-

BILL ZIMMERMAN
Net Present Value (OPTION 2)
Particulars Cash Flows Present Value Factor @12% Present value
(a) (b) (c=a*b)
$ $
Equipment purchase & installation -82120 1 -82120
Annual cash inflow (10 years) 31070 5.6502 175552
Equipment overhaul in year 5 -6250 0.5674 -3546
Net Present Value $ 89885
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