A Manufacturing Company anticipates an increase in market demand for its products, which is expected to last 15 years, after which the Company intends to decommission the relative production line. To increase productivity, the Company evaluates three options:

Option 1 : refurbish the existing production line for a cost of $300,000.

Option 2 : add a new smaller production line to the existing one for a cost of $400,000.

Option 3 : sell the existing production line on the used equipment market for $80,000 and install a new modern production line for a cost of $1,000,000.

The data related to the three options are:

Refurbish Add Small Line Modern Line

Implementation 300,000 400,000 1,000,000

Initial O&M 45,000 45,000 50,000

Gradient on O&M 1,000 3,000 4,000

Benefits 110,000 120,000 200,000

Salvage (present) N/A N/A 80,000(sell old line)

Salvage (in 15 years) 100,000 120,000 150,000

QUESTIONS (show Excel calculations supporting your answers):

1. What are the values of cost of capital that would render null the Net Present Values of the three options?
2. Assuming the Companys cost of capital is 5%: (a) if the selection criterion is maximizing the NPW of the investment, which option would you recommend? (b) if the selection criterion is maximizing the ROI, which option would you recommend?
3. Assuming the Companys cost of capital is 9%: (a) if the selection criterion is maximizing the NPW of the investment, which option would you recommend? (b) if the selection criterion is maximizing the ROI, which option would you recommend?
4. Use Incremental Analysis to identify the value of cost of capital where your selection based on maximizing NPW would change.
5. If the target Minimum Acceptable Rate of Return (MARR) is 50%, what would be the maximum cost of capital which the Company could afford?