Question
1. Vita Pharmaceutical Co. is considering four proposals for the expansion of its dietary supplements production facility. The investment requirements and the cash flows for
1. Vita Pharmaceutical Co. is considering four proposals for the expansion of its dietary supplements production facility. The investment requirements and the cash flows for an 8-year period are presented below:
P1 P2 P3 P4
Initial Investment P13M P14.5M P15M P15.8M
Annual receipts 1.5M 1.6M 1.7M 2.2M
Annual disbursements 0.7M 0.5M 0.65M 0.7M
Salvage value 1.3M 1.5M 2M 2.5M
Determine the best alternative if the company applies 14% MARR for its investments. (Ans. Consider P4; i2-1 = 13.2%; i3-1=5.91%; i4-1=21.76%)
2. A firm that applies a 20% MARR on its investments is considering one of two 7-year engineering projects. Project 1 requires an initial investment of P4M, would generate an annual income of P2M, and would entail an annual cost of P0.4M. Project 2 requires P7M, would generate an annual income of P3.7M for the first three years and P3M for the remaining four years, this project would incur annual disbursements of P0.8M. Indicate the better alternative using the incremental investment approach. (Ans. Project 2 is better; i2-1=29.17%)
3. Two anti-pollution project proposals are being considered by Energon Industries. The expected cash flows are as follows:
End of Year Project 1 Project 2
0 - P3.5M - P4.5M
1 - P0.25M - P0.125M
2 - P0.375M - P0.25M
3 - P0.5M - P0.375M
4 - P0.625M - P0.5M
5 - P1.55M - P0.625M
Using the incremental investment approach and a 12% MARR, determine the better alternative. (Ans. i2-1=9.17%; select Project 1)
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