Two alternatives to investing in an e-commerce business with a five-year horizon are being considered. The first alternative (A) has an initial investment cost of 21,000 Euros and it is estimated that an additional investment cost of 10,000 Euros will be required in the third year (due to the necessary adjustment of the content in the online material). Benefits of around 12,000 Euros per year are expected and the entire investment will have a final value estimated at 15,000 Euros at the end of 5 years. The second alternative (B) includes respectively an initial investment of 25,000 Euros and an additional investment of 20,000 Euros at the end of the third year. The annual benefits are now expected to rise to 15,000 Euros while this investment will have an estimated final value of 20,000 Euros. For a minimum acceptable rate of return (MARR - ie opportunity cost) equal to 10%, answer the following questions: 

(a) Which alternative is the most advantageous? Use a cost-benefit ratio first (consider whichever definition you prefer) and confirm your decision with an internal degree of efficiency (if you want to make sure of the prevailing solution, you can use it quickly and at present value). 

(b) What is your decision, if there is also a 30% tax while there is an annual linear depreciation for the 5 years in which only the initial investment amount and the estimated final value should be calculated? Work now at present value.

Answer rating: 100% (QA)

Solution Showing cost benefit ratio Discounting Rate10ie opportunity cost 1 When there is no tax Alternative A aTotal cost Initial Cost21000 Euros Pre... View the full answer