Question

3. ACME Corp. is evaluating three opportunities to make money:
Option A: Replace outdated equipment to reduce defective parts. Initial cost = $200,000. Annual
savings from not having to remake parts: $53,000. Salvage value of equipment at the end of the 10-year
study period: $10,000.
Option B: Change packaging to reduce shipping costs. Initial cost = $180,000. Annual savings in
shipping costs: $30,000. Salvage value of equipment at the end of the 10-year study period: $0.
Option C: Manufacture parts in-house rather than purchase them. Initial cost = $250,000. Annual
savings from eliminating the outside vendor = $60,000. Salvage value of equipment at the end of the
10-year study period: $20,000.
If ACME only has $300,000 of capital available to pay the initial cost, it can only choose one project.
Which project should they choose? Assume ACME’s MARR is 14% per year.
4. In the previous problem, if ACME had enough capital to fund all of the projects, which one(s) should
they choose?

Answer 1

Present worth of option A = -200000 + 53000 (P/A,14%,10) + 10000 (P/F, 14%, 10)

= -200000 + 53000*5.216115646 + 10000 * 0.269743

= 79151.55

Present worth of option B = -180000 + 30000 (P/A,14%,10)

= -180000 + 30000 * 5.216115646

= -23516.53

Present worth of option C = -250000 + 60000 (P/A,14%,10) + 20000 (P/F, 14%, 10)

= -250000 + 60000 * 5.216115646 + 20000 * 0.269743

= 68361.798

If only one projecct is to be chossen then ACME should choose Option A as it has highest NPV among the three options

If two project are to be chossen then ACME should only choose Option A & Option C as they have positive NPV