A construction company is considering procuring one of two types of heavy construction equipment (A and B). Each type of equipment is expected to have a 5-year useful life with zero salvage value. A can be purchased at a cost of $30,000, while B would cost $55,000. The net cash flows for each type of equipment are given below. Year A В -$30,000 -$55,000 1 $6,000 $24,000 2 $6,000 $10,000 3 $12,000 $21,000 4 $6,000 -$7,000 $25,564 $26,610 (a) Using the conventional payback period approach, determine which alternative the company should purchase. (b) Consider the time value of money to be 12%. Use the benefit cost ratio approach and determine which alternative the company should procure. (c) Which project should be selected if NPV or NFV were used? (d) Explain any differences in results.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A construction company is considering procuring one of two types of heavy construction
equipment (A and B). Each type of equipment is expected to have a 5-year useful life with
zero salvage value. A can be purchased at a cost of $30,000, while B would cost $55,000.
The net cash flows for each type of equipment are given below.
Year
A
В
-$30,000
-$55,000
1
$6,000
$24,000
2
$6,000
$10,000
3
$12,000
$21,000
4
$6,000
-$7,000
5
$25,564
$26,610
(a)
Using the conventional payback period approach, determine which alternative the
company should purchase.
(b)
Consider the time value of money to be 12%. Use the benefit cost ratio approach
and determine which alternative the company should procure.
(c)
Which project should be selected if NPV or NFV were used?
(d)
Explain any differences in results.
LO
Transcribed Image Text:A construction company is considering procuring one of two types of heavy construction equipment (A and B). Each type of equipment is expected to have a 5-year useful life with zero salvage value. A can be purchased at a cost of $30,000, while B would cost $55,000. The net cash flows for each type of equipment are given below. Year A В -$30,000 -$55,000 1 $6,000 $24,000 2 $6,000 $10,000 3 $12,000 $21,000 4 $6,000 -$7,000 5 $25,564 $26,610 (a) Using the conventional payback period approach, determine which alternative the company should purchase. (b) Consider the time value of money to be 12%. Use the benefit cost ratio approach and determine which alternative the company should procure. (c) Which project should be selected if NPV or NFV were used? (d) Explain any differences in results. LO
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