E11-11 Using NPV to Evaluate Mutually Exclusive Projects [LO 11-5]

Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsas cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsas controller:

	Option A			Option B
Initial investment	$	320,000		$	454,000
Annual cash inflows		150,000			160,000
Annual cash outflows		70,000			75,000
Costs to rebuild		120,000			0
Salvage value		0			24,000
Estimated useful life		8	years		8	years

Required: Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.) Determine which option Tulsa should select?

	Option B
	Option A