Question

An alternative that has an initial cost of 137800 TL, annual revenues of 44000 TL, annual costs of 11000 TL is being considered. The useful life of the alternative is determined as n years and the salvage value at the end of 8 years is expected to be 11440 TL. MARR is  12% per year.

a) Determine whether the alternative is an attractive one or not?
b) The decision maker is not certain about the expectations for annual revenues. So, calculate the breakeven point for the annual revenues.

c) The decision maker is not certain about the annual expenses. Calculate the breakeven point for the annual expenses.

IN EXCEL PLZ!!

Answer 1

Here,

Initial Cost = 137800 TL

Annual Revenue = 44000 TL

Annual Cost = 11000 TL

Yearly net revenue = 44000 - 11000 = 33000 TL

Salvage value after 8 years = 11440 TL

So we consider n to be 8

MARR = 12%

a)

NPV of the Alternative = - 137800 + 33000/(1+.12)+ 33000/((1+.12)^(2))+ 33000/((1+.12)^(3))+ 33000/((1+.12)^(4))+ 33000/((1+.12)^(5))+ 33000/((1+.12)^(6))+ 33000/((1+.12)^(7))+ (33000+11440)/((1+.12)^(8))

NPV = 30752.54 TL

Since NPV > 0 hence, alterative should be considered

b)

Since revenue is not known,

Let R be the revenue so we have,

NPV = 0 for Break even

0 = - 137800 + (R- 11000)/(1+.12)+ (R-11000)/((1+.12)^(2))+ (R - 11000)/((1+.12)^(3))+ (R-11000)/((1+.12)^(4))+ (R-11000)/((1+.12)^(5))+ (R-11000)/((1+.12)^(6))+ (R-11000)/((1+.12)^(7))+ (R-11000+11440)/((1+.12)^(8))

R = 37809.43

C)

Since Annual Expenses is not known,

Let A be the Annual Expenses so we have,

NPV = 0 for Break even

0 = - 137800 + (44000- A)/(1+.12)+ (44000-A)/((1+.12)^(2))+ (44000 - A)/((1+.12)^(3))+ (44000-A)/((1+.12)^(4))+ (44000-A)/((1+.12)^(5))+ (44000-A)/((1+.12)^(6))+ (44000-A)/((1+.12)^(7))+ (44000-A+11440)/((1+.12)^(8))

A = 17190.57