A consulting company hired you a few weeks after you received your engineering degree from Memorial University. Given that you did so well in your engineering economics course, your boss assigned you to do a feasibility study on a new technological line to produce environmentally friendly cell phone cases. Experts identified three mutually exclusive alternatives. Your boss gave you the information given in the following table: Alternative 1 Alternative 2 Alternative 3 Initial investment $1.2 million $1.3 million $1.4 million Operating costs $0.3 million/year $0.5 million/year $0.6 million/year Production 5,000 cases/year 8,000 cases/year 10,000 cases/year If the price of a cell phone case is $100, the annual interest rate is 6.7%, and the service life is 5 years for all alternatives, which one is the best? 

NOTE: Show all your workings, i.e., assumptions, rationale, formulae, cash flow diagrams, etc., to get full credit.

 

Initial investment Operating costs Production Alternative 1 $1.2 million $0.3 million/year 5,000 cases/year Alternative 2 $1.3 million $0.5 million/year 8,000 cases/year Alternative 3 $1.4 million $0.6 million/year 10,000 cases/year