The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 7%, and the projects' expected net costs are listed in the following table: Expected Net Cost Year Conveyor Forklift 0 -$500,000 -$200,000 1 -120,000 -160,000 2 -120,000 -160,000 3 -120,000 -160,000 4 -120,000 -160,000 5 -20,000 -160,000 What is the IRR of each alternative? The IRR of alternative 1 is -Select-undefined 5% 7% 9% Item 1 . The IRR of alternative 2 is -Select-undefined 5% 7% 9% Item 2 . What is the present value of costs of each alternative? Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any. Alternative 1: $ Alternative 2: $ Which method should be chosen? -Select-IRR methodPV methodItem 5 should be chosen.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 20P: The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting,...

See similar textbooks

Related questions

Concept explainers

Question

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 7%, and the projects' expected net costs are listed in the following table:

	Expected Net Cost
Year	Conveyor	Forklift
0	-$500,000		-$200,000
1	-120,000		-160,000
2	-120,000		-160,000
3	-120,000		-160,000
4	-120,000		-160,000
5	-20,000		-160,000

What is the IRR of each alternative?
The IRR of alternative 1 is -Select-undefined 5% 7% 9% Item 1 .

The IRR of alternative 2 is -Select-undefined 5% 7% 9% Item 2 .
What is the present value of costs of each alternative? Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any.
Alternative 1: $

Alternative 2: $

Which method should be chosen?

-Select-IRR methodPV methodItem 5 should be chosen.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions