Question

The 16 overhead doors on your loading dock must be replaced now. The deluxe model costs $2,200 each and will last for six years. The standard model costs $1,600 each and will last for four years. The deluxe model is aluminum, so it will have a scrap value of $150 at the end of its life. The standard model is plastic and has no scrap value. The use of the deluxe model on the loading dock will also save your company $1,000 per year in heating costs because of its ability to seal better. If you use an interest rate of 12% and present worth analysis, which door will you recommend

Answer 1

You should purchase standard doors because the present value of that purchase is -$25,600, while the NPV of purchasing aluminum doors is -$30,195.56.

Step-by-step explanation:

we have to compare the present value of both alternatives:

alternative 1: purchase aluminum deluxe doors:

cash flow year 1 = (16 x -$2,200) = -$35,200

cash flow year 1 - 5 = $1,000

cash flow year 6 = $1,000 + (16 x $150) = $3,400

NPV = -$35,200 + $1,000/1.12 + $1,000/1.12² + $1,000/1.12³ + $1,000/1.12⁴ + $1,000/1.12⁵ + $3,400/1.12⁶ = -$35,200 + $892.86 + $797.19 + $711.78 + $635.52 + $497.18 + $1,469.91 = -$30,195.56

alternative 2: purchase standard doors

NPV = 16 x -$1,600 = -$25,600