Two energy saving project have been identified by Company ABC. These potential projects are known as...

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Finance

Two energy saving project have been identified by Company ABC.These potential projects are known as project
A and 8 . The projects require different investments and costs asindicated in the Table below ..
Financial item OPTION A (million) OPTION B (million)
First cost 5000 700
Economic life in years 10 5
Salvage value 100 150
Annual operating costs 5 10
Major overhaul costs in year 5 20 0
Increase in annual operating costs from year andthereafter 1.5 2
Penalty costs due to environmental
pollution 2 from year five and thereafter 1 annually from year 2 to 5 and thereafter
Savings in annual energy costs 250 300
Company ABC would like to know which project is worth pursuing.Use an internal rate of return method to
establish the most viable project

Answer & Explanation Solved by verified expert

4.1 Ratings (529 Votes)

Cash flow Savings in annual energy costs first cost annual operating cost penalty cost major overhaul cost salvage value Option A cash flows Year n 0 1 2 3 4 5 6 7 8 9 10 First cost 5000 See Answer

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Transcribed Image Text

Two energy saving project have been identified by Company ABC.These potential projects are known as projectA and 8 . The projects require different investments and costs asindicated in the Table below ..Financial itemOPTION A (million)OPTION B (million)First cost5000700Economic life in years105Salvage value100150Annual operating costs510Major overhaul costs in year 5200Increase in annual operating costs from year andthereafter1.52Penalty costs due to environmentalpollution2 from year five and thereafter1 annually from year 2 to 5 and thereafterSavings in annual energy costs250300Company ABC would like to know which project is worth pursuing.Use an internal rate of return method toestablish the most viable project

Financial item	OPTION A (million)	OPTION B (million)
First cost	5000	700
Economic life in years	10	5
Salvage value	100	150
Annual operating costs	5	10
Major overhaul costs in year 5	20	0
Increase in annual operating costs from year andthereafter	1.5	2
Penalty costs due to environmental pollution	2 from year five and thereafter	1 annually from year 2 to 5 and thereafter
Savings in annual energy costs	250	300