A company has to choose between two projects whose cash flows are as indicated
below;
Project 1:
i. Investment – Rs. 15 Lakhs
ii. Annual cost savings – Rs. 4 lakhs.
iii. Bi-annual maintenance cost – Rs. 50,000/-
iv. Reconditioning and overhaul during 5th year: 6 lakhs
v. Life of the project – 8 years
vi. Salvage value – Rs. 5 lakhs
Project 2:
vii. Investment – Rs. 14 Lakhs
viii. Annual cost savings – Rs. 3.5 lakhs.
ix. Annual Maintenance cost – Rs. 20,000/-
x. Reconditioning and overhaul during 4th year: 5 lakhs
xi. Life of the project – 8 years
xii. Salvage Value- 2 lakhs
Which project should the company choose? The annual discount rate is 12
below;
Project 1:
i. Investment – Rs. 15 Lakhs
ii. Annual cost savings – Rs. 4 lakhs.
iii. Bi-annual maintenance cost – Rs. 50,000/-
iv. Reconditioning and overhaul during 5th year: 6 lakhs
v. Life of the project – 8 years
vi. Salvage value – Rs. 5 lakhs
Project 2:
vii. Investment – Rs. 14 Lakhs
viii. Annual cost savings – Rs. 3.5 lakhs.
ix. Annual Maintenance cost – Rs. 20,000/-
x. Reconditioning and overhaul during 4th year: 5 lakhs
xi. Life of the project – 8 years
xii. Salvage Value- 2 lakhs
Which project should the company choose? The annual discount rate is 12