The project management team is evaluating proposals from their engineering staff. The staff has proposed two mutually exclusive project options (meaning only one project can be selected). Option B - Midsize Capacity Initial Investment $60,000 Operating & Maintenance (Annual) $ 8,000 Salvage Value $ 5,000 Life-span 4 Years Option C- Large Capacity Initial Investment $110,000 Operating & Maintenance (Annual) $ 12,000 Salvage Value $ 18,000 Life-span 6 Years Each option represents a new direction for the company and as such the initial revenues from sales of product will have to be developed but once the product market is established we expect to be able to maintain sales revenues at the level of capacity that each option provides. Thus, the revenues will increase (ramp) during the first three years to a steady-state condition starting at the end of year three Revenues are expected to remain at steady-state as long as production is continued. The project management team uses a MARR rate of 5.00%. The production revenues for each option are: Production Revenue (Years 1 & 2) & Steady-State Production (Year 3+) Year Option B Option C 0 1 $16,000 / yr $15,000 / yr 2 $32,000/ yr $30,000/ yr 3 $48,000 / yr $45,000 / yr Years (3+) $48,000/ yr $60,000/ yr Questions: a) (4 pts) Draw Cash flow diagrams OR provide a clear table showing an appropriate planning horizon for comparing the options and the cash flows for each. b) (6 pts) What is the NPV for each project based on an LCM planning horizon? c) (4 pts) What is the AW for each project based on an LCM planning horizon? d) (3 pts) Based on the results above, which project would be recommended? Explain the decision clearly and why the choice is appropriate. e) (3 pts) What is option A? f) (4 pts) Does the choice of planning horizon have any specific impact on results in (b), (c) and the decision made in (d)? Discuss (NO calculations are required). g) (4 pts) What impact would a higher MARR rate have on the results in (b), (c) and the decision made in (d)? Discuss (NO calculations are required). The project management team is evaluating proposals from their engineering staff. The staff has proposed two mutually exclusive project options (meaning only one project can be selected). Option B - Midsize Capacity Initial Investment $60,000 Operating & Maintenance (Annual) $ 8,000 Salvage Value $ 5,000 Life-span 4 Years Option C- Large Capacity Initial Investment $110,000 Operating & Maintenance (Annual) $ 12,000 Salvage Value $ 18,000 Life-span 6 Years Each option represents a new direction for the company and as such the initial revenues from sales of product will have to be developed but once the product market is established we expect to be able to maintain sales revenues at the level of capacity that each option provides. Thus, the revenues will increase (ramp) during the first three years to a steady-state condition starting at the end of year three Revenues are expected to remain at steady-state as long as production is continued. The project management team uses a MARR rate of 5.00%. The production revenues for each option are: Production Revenue (Years 1 & 2) & Steady-State Production (Year 3+) Year Option B Option C 0 1 $16,000 / yr $15,000 / yr 2 $32,000/ yr $30,000/ yr 3 $48,000 / yr $45,000 / yr Years (3+) $48,000/ yr $60,000/ yr Questions: a) (4 pts) Draw Cash flow diagrams OR provide a clear table showing an appropriate planning horizon for comparing the options and the cash flows for each. b) (6 pts) What is the NPV for each project based on an LCM planning horizon? c) (4 pts) What is the AW for each project based on an LCM planning horizon? d) (3 pts) Based on the results above, which project would be recommended? Explain the decision clearly and why the choice is appropriate. e) (3 pts) What is option A? f) (4 pts) Does the choice of planning horizon have any specific impact on results in (b), (c) and the decision made in (d)? Discuss (NO calculations are required). g) (4 pts) What impact would a higher MARR rate have on the results in (b), (c) and the decision made in (d)? Discuss (NO calculations are required)
