Assignment for week 4 is to take two options and compare them in order to decide which is the best investment. When war-gaming these exercises we follow these assumptions: 1) it must have a positive net result. 2) Regardless of the amount of difference we always chose the one with the best net number.

Lets assume you are debating on either building a new, expense industrial washing and drying system that will make your cleaning operation faster and more efficient OR you are going to use the money to increase your delivery system thus increasing your marketing area. Assume 4% interest/inflation. Again, use only chart A-3.

Problem #1

Option 1: for those of you who dealt with depreciation in Financial Accounting ignore its existence for this exercise

You buy a new machine with a 5-year life expectancy. The machine will cost you $2M and you expect it will make you $500,000 per year in net profit.

Option 2: You will buy 5 new trucks (total $500,000) and they will have an operating costs and salaries of $200,000 per year. You expect to have an increase in sales of $500,000 per year. Keep in mind you have to apply the inflationary numbers (%) to both the income and the operating costs. Calculate 5 years expenses/profits.

This is getting a little ahead of next weeks assignment, but you do not have to apply any inflation factors to the money spent on the machine or the trucks. Ill explain why next week.

Problem #2

You own a ski resort and you are considering two options to help handle the increased usage of your slopes. Assume 6% interest/inflation

Option 1 is to buy a new ski lift and remove the old one. You can sell the old one for $100,000 which will help reduce your overall costs. You will pay $3M today and you will have an annual maintenance costs of $250,000 per year. You expect to be able to use this for 7 years. This new larger lift is expected to bring in $800,000 a year for the next 7 years.

Option 2 is to repair your old ski lift at a cost of $1M today and will have annual repair/maintenance costs of $400,000 per year. You expect you can have revenues of $650,000 per year for the same 7 years.

Show your work and then explain why you pick option 1 or 2.