Analyze the following case study and choose the best option based on the following:
According to the present-worth criterion, which option would you recommend at i = 12%?
Dynamic Corporation requires a chemical finishing process for a product under contract for a period of six years. Three options are available. Neither option 1 nor option 2 can be repeated after its process life. However, option 3 will always be available from Z&Z Chemical Corporation at the same cost during the period that the contract is operative.
Option 1: Process device A, which costs $100,000 has annual operating and labor costs of $60,000 and a useful service life of four years with an estimated salvage value of $10,000.
Option 2: Process device B, which costs $150,000, has annual operating and labor costs of $50,000 and a useful service life of six years with an estimated salvage value of $30,000.
Option 3: Subcontract out the process at a cost of $100,000
Answer the following 3 questions.
1. What is the equivalent Net Present Worth of Option 1?
a. $ -383,292
b. $ 383,292
c. $ 411,134
d. $ -411,134
2. What is the equivalent Net Present Worth of Option 2?
a. $ -310,899
b. $ -325,111
c. $ -340,371
d. $ -383,292
3. Which Option appears to be the best alternative?
a. Option 1
b. Option 2
c. Option 3