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San Ratael Breweries are looking into investing into a production factory, after rigorous designs and bids submitted by contractors the options are narrowed down to two options, OMCI Inc
San Ratael Breweries are looking into investing into a production factory, after rigorous designs and bids submitted by contractors the options are narrowed down to two options, OMCI Inc. offers a solution which will cost the company an initial cost of 20,000,000 Php in building Infrastructure, 10,000,000 in equipment and annual expenses of 4,500,000 in maintenance, and salary of the plant. At the end of the life span of the plant after 20 years it would have a salvage value of 4,000,000. MDB Inc. offers a solution which will cost the company 16,000,000 Php in infrastructure, 8,000,000 in Equipment and annual expenses of 5,000,000 for maintenance and salary, and a salvage value of 3,500,000. Assuming both plants will produce equal performance in terms of revenue and both have a life span of 15 years, what is the value of the cheaper option if money is at 6%? use the present worth method.
Expert Solution
| Answer: | ||||
| Particulars | DMCJ Inc. | MDB Inc. | ||
| Initial cost in building (a) | 20,000,000.00 | 16,000,000.00 | ||
| Initial cost in equipment (b) | 10,000,000.00 | 8,000,000.00 | ||
| Annual expenses | 4,500,000.00 | 5,000,000.00 | ||
| Useful life | 15 years | 15 years | ||
| PV of annual expenses © | 43,704,900.00 | 48,561,000.00 | ||
| 4,500,000*PVAF(6%,15) | 5,000,000*PVAF(6%,15) | |||
| 4,500,000 * 9.7122 | 5,000,000 * 9.7122 | |||
| Salvage value after 20 years | 4,000,000.00 | 3,500,000.00 | ||
| PV of salvage (d) | 1,247,220.00 | 1,460,427.50 | ||
| 4,000,000*PVIF(6%,20) | 3,500,000*PVIF(6%,15) | |||
| 4,000,000 * 0.311805 | 3,500,000 * 0.417265 | |||
| PV of total costs | 72,457,680.00 | 71,100,572.50 | ||
| (a+b+c-d) | CHEAPER OPTION | |||
| Since, both the solutions given have an equal useful life, so, NPV can be the criterion to | ||||
| determine the cheaper option. If both the solution had different useful lives, then, | ||||
| Annual equivalent costs would have been considered. | ||||
| so, as per the calculations above, | ||||
| The solution offered by MDB Inc. is a cheaper alternative as compared to DMCJ Inc. | ||||
| Please rate my answer well. | ||||
| Thanks a lot in advance. |
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