QA petrochemical industry located at Hub- Pakistan uses certain mixers. A tender notice was issued to procure the desired mixer. Two mixers were shortlisted based on their technical feasibility. Now the short listing has come down to the point of financial feasibility. Mixer A has an initial cost of $25,000 and Mixer B has initial cost of $32,000. An estimated market value of $1500 could be obtained for the mixer A if it is sold after it’s useful life. Some problems may be experienced with Mixer A which will be catered by replacing certain spare parts averaging at an annual cost of $2,250. Annual operating and maintenance expenses have been averaging $2000. Annual insurance is 2% of the initial capital whereas and asset tax expenses are 3% of the initial capital investment. The mixer A will be able to provide service for 10 years if the present maintenance and repair practice is continued. The revenue it saves is $10,550 per year. Whereas, a market value of $2000 could be obtained for the mixer B if it is sold after its 10 years life. Problems experienced with Mixer B will be catered by replacing certain spare parts averaging at an annual cost of $1,750. Annual operating and maintenance expenses have been averaging $1,500. Annual insurance is 2% of the initial capital whereas and asset tax expenses are 3% of the initial capital investment. The revenue it saves is $12,250 per year.(Use MARR as 13%)

A) Select and JUSTIFY the better option out of the two mixers based upon discounted payback period.

B) Select and JUSTIFY the better option out of the two mixers based using Internal Rate of Return method.

Answer rating: 100% (QA)

Answer A Discounted Payback Period Method MARR 13 Mixer A End Of Year n Capital Expense Revenue Expense Market Value Net Cash Flow Capital Expense Rev... View the full answer