As the General Manager of a Manufacturing Company you are considering to add a new line of products which you anticipate will capture a market share for the next 20 years. You consider two potential options:
Option A Option B
Investment 900,000 600,000
Annual Benefits 150,000 150,000
Annual O&M 35,000 40,000
Salvage Value 100,000 90,000
Line useful Life (yr) 20 10
Project life horizon (yr) 20 20
QUESTIONS
- Write the equations for NPW (A) and NPW (B) using Compound Interest Factors and undefined interest rate i
- Find the interest rates which will make NPW (A) and NPW (B) equal to 0 (show how you do it)
- Using Incremental Analysis find the interest rate which will make NPW (A) = NPW (B) (show how you do it)
- Assume now that you know the Cost of Capital for your Company is 6%, and you want to maximize the investment’s NPW, which option would you choose? (Show how you choose)
- If you know that the Cost of Capital for your Enterprise is 6%, and you want an ROI of at least 20%, would invest in Option A, Option B, or renounce to invest? (Show how you choose)