Leonard Motors is trying to increase its international export business. It is considering several alternatives. Two were available earlier (per Problem 5.11), but a new one has recently been proposed by a potential internationally partnering corporation, which has funds to invest. Option 1: Equipment costs $900,000 now and another $560,000 in 2 years Annual M&O costs of $79,000 Life of project is 10 years Salvage value is nil Option 2: Subcontract production for annual payment of $280,000 for years 0 (now) through 10 Annual M&O cost is zero Life of project is 10 years Salvage value is nil Option 3: Costs are $400,000 in year 1 plus an additional 5% each year through year 5 Revenues are $50,000 per year for years 6 through 10 Life of project is 10 years Equipment salvage value is $100,000 paid in year 10 by international partner Due to stock market pressures, Leonard plans to change its MARR from its current 20% per year to 15% per year, compounded quarterly. Use PW analysis to select the best of the three options.
Leonard Motors is trying to increase its international
export business. It is considering several alternatives.
Two were available earlier (per Problem 5.11),
but a new one has recently been proposed by a potential
internationally partnering corporation, which
has funds to invest.
Option 1: Equipment costs $900,000 now and another
$560,000 in 2 years
Annual M&O costs of $79,000
Life of project is 10 years
Salvage value is nil
Option 2: Subcontract production for annual payment
of $280,000 for years 0 (now)
through 10
Annual M&O cost is zero
Life of project is 10 years
Salvage value is nil
Option 3: Costs are $400,000 in year 1 plus an additional
5% each year through year 5
Revenues are $50,000 per year for years
6 through 10
Life of project is 10 years
Equipment salvage value is $100,000
paid in year 10 by international partner
Due to stock market pressures, Leonard plans to
change its MARR from its current 20% per year to
15% per year, compounded quarterly. Use PW
analysis to select the best of the three options.
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