A Company is considering to invest in a venture project and they have three options: two they can buy and…

A Company is considering to invest in a venture project and they have three options: two they can buy and one is a subcontract. Unfortunately, they have recently learned that the sole sources for processes they can buy are getting out of the business and only one machine of each is available. Their project will last four years and they will sell the machines after four years. Assume they have a profitable use. These are pre-taxed dollars so don’t use depreciation. A: Costs $180,000, has an annual operating costs of $65,000 and a service life of eight years. Estimated salvage $-110,000 (negative) B: Costs $250,000, has an annual operating costs of $50,000 and a service life of six years with an estimated salvage of $-120,000 C: subcontract the processs at an annual cost of $160,000 guaranteed for four years and requiring a four year commitment. This option is renewable for another four years at an increase for a maximum of $80,000 per year if needed because of market conditions. Use MARR of 10% and assess options using present worth. Under what conditions might the company be a better option? What happens if the project gets cancelled after two years? Show calculations

 

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