Question

Analyze the following case study and choose the best option based on the following:

According to the present-worth criterion, which option would you recommend at i = 12%?

Dynamic Corporation requires a chemical finishing process for a product under contract for a period of six years. Three options are available. Neither option 1 nor option 2 can be repeated after its process life. However, option 3 will always be available from Z&Z Chemical Corporation at the same cost during the period that the contract is operative.

Option 1: Process device A, which costs $100,000 has annual operating and labor costs of $60,000 and a useful service life of four years with an estimated salvage value of $10,000.

Option 2: Process device B, which costs $150,000, has annual operating and labor costs of $50,000 and a useful service life of six years with an estimated salvage value of $30,000.

Option 3: Subcontract out the process at a cost of $100,000

Answer the following 3 questions.

1. What is the equivalent Net Present Worth of Option 1?

a.	$ -383,292

b.

$ 383,292

c.

$ 411,134

d.	$ -411,134

2. What is the equivalent Net Present Worth of Option 2?

a.	$ -310,899

b.	$ -325,111

c.	$ -340,371

d.	$ -383,292

3. Which Option appears to be the best alternative?

a.

Option 1

b.

Option 2

c.

Option 3

Answer 1