You have been hired as a project management consultant to assist the Acme Company in evaluating...

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Finance

You have been hired as a project management consultant to assistthe Acme Company in evaluating two different project proposals theyare considering. Proposal A calls for the construction of a newplant which will require three years to complete and will have muchgreater capacity than the old plant. Because the plant will have tobe built on the current site, the old plant will have to be razed.Proposal B involves the renovation of this plant. This renovationwill require two years to complete, but the plant can remain inoperation in a reduced capacity during this upgrade. Once therenovation is complete revenue will be increased by 25% per year,however annual maintenance will be 50% higher than Proposal A.
Proposal A: Build New Plant
         Year1 Year2Year3   Year4   Year5   Year6 Year7Year8 Year9   Year10
Revenue 0     0       0   400    800     800    800  800    800     800
Expense 800    600   600    50     50      50     50    50     50  50
Proposal B: Renovate Existing Plant
        Year1   Year2 Year3   Year4 Year5  Year6   Year7 Year8 Year9 Year10
Revenue 100   100   350     350    350     350    350   350     350   350
Expense 500   500   75      75     75      75     75    75     75      75
Questions:
a.   What is the profit associated with the projectcarried out in Proposal A? Proposal B?
b.   When does payback occur on the project carriedout in Proposal A? Proposal B?
c.   What is the present value of revenue for theproject carried out in Proposal A? Proposal B? (In computingpresent value, do not discount the value for the firstyear being examined.) (Assume i = 0.10)
d.   What is the present value of expense for theproject carried out in Proposal A? Proposal B? (In computingpresent value, do not discount the value for the firstyear being examined.) (Assume i = 0.10)
e.   What is net present value for the projectdescribed in Proposal A? Proposal B? (In computing present value,do not discount the value for the first year beingexamined.) (Assume i = 0.10)
f.    What is the internal rate of return for theproject described in Proposal A? Proposal B?
g.   Which project would you recommend? Why? What arethe merits? What are the risks?

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4.1 Ratings (510 Votes)

I have firstanswered all your questions sequentially All back up calculationsare there in the table towards the end of thesolutiona What is the profit associated with the projectcarried out in Proposal A Proposal BProposal A 2850Proposal B 1400b When does payback occur on the project carriedout in Proposal A Proposal BProposal A 620 yearsProposal B 491 yearsc What is the present value of revenue for theproject carried out in Proposal A Proposal B In computingpresent value do See Answer

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You have been hired as a project management consultant to assistthe Acme Company in evaluating two different project proposals theyare considering. Proposal A calls for the construction of a newplant which will require three years to complete and will have muchgreater capacity than the old plant. Because the plant will have tobe built on the current site, the old plant will have to be razed.Proposal B involves the renovation of this plant. This renovationwill require two years to complete, but the plant can remain inoperation in a reduced capacity during this upgrade. Once therenovation is complete revenue will be increased by 25% per year,however annual maintenance will be 50% higher than Proposal A.Proposal A: Build New Plant Year1 Year2Year3 Year4 Year5 Year6 Year7Year8 Year9 Year10Revenue 0 0 0 400 800 800 800 800 800 800Expense 800 600 600 50 50 50 50 50 50 50Proposal B: Renovate Existing Plant Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10Revenue 100 100 350 350 350 350 350 350 350 350Expense 500 500 75 75 75 75 75 75 75 75Questions:a. What is the profit associated with the projectcarried out in Proposal A? Proposal B?b. When does payback occur on the project carriedout in Proposal A? Proposal B?c. What is the present value of revenue for theproject carried out in Proposal A? Proposal B? (In computingpresent value, do not discount the value for the firstyear being examined.) (Assume i = 0.10)d. What is the present value of expense for theproject carried out in Proposal A? Proposal B? (In computingpresent value, do not discount the value for the firstyear being examined.) (Assume i = 0.10)e. What is net present value for the projectdescribed in Proposal A? Proposal B? (In computing present value,do not discount the value for the first year beingexamined.) (Assume i = 0.10)f. What is the internal rate of return for theproject described in Proposal A? Proposal B?g. Which project would you recommend? Why? What arethe merits? What are the risks?