The purchase of a loader is needed to enable the expansion into Windsor. There are two options to consider. Money is worth 10% compounded annually Loader A has a purchase cost of $150 000. Net cash flows would be: • $30 000 per year for the first 3 years,
• $40 000 for the next year,
• $30 000 for the next 4 years,
• $14 000 for the last 2 years,
• Estimated salvage value: $20 000 at end of 10 years.
Loader B has a purchase cost of $180 000. Net cash flows would be:
• $20 000 per year for the first 2 years,
• $40 000 per year for the next 3 years,
• $30 000 per year for each of the last 5 years
• Estimated salvage value: $11 000 at end of 10 years.
Calculate for each of the loaders:
a. NPV
b. IRR
c. Profitability index
d. Based on this numerical analysis, what advice would you give to Kelsey Bowen?