Response to the following problem:
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 8 percent, and the projects' expected net costs are listed in the table:
|
Year
|
EXPECTED NET COST
|
|
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)
|
a. What is the IRR of each alternative?
b. What is the present value of costs of each alternative? Which method should be chosen?