Question

Cheezburger Distributors handles the warehousing of perishable foods and is considering replacing one of its primary cold storage units.

Supplier A has offered a unit for $250,000 with an expected life of 10 years. The unit is projected to reduce electricity costs by $50,000 per year. However, it requires a $20,000 refurbishing every two years, beginning two years after purchase.

Supplier B has offered a cold storage unit with similar capabilities for $300,000. It will produce the same savings in electricity costs, but requires refurbishing every five years at a cost of $40,000.

Zuker's cost of capital is 8.5%. Use NPV to determine which cold storage unit Zuker should select. Round to the nearest dollar, enter negatives with a minus (-), don't include the "$" or commas.

a. Supplier A NPV = ? $

b. Supplier B NPV = ? $

c. The preferred supplier is ("Supplier A" or Supplier B") - ?

Answer 1