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Present Value of Costs
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 6%, 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
3
4
5
-20,000
Question a. What is the IRR of each alternative?
Question b. 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?
Year 1 $ 300,000 Year 2 (700,000) Year 3 1,200,000 For each year, there were no deferred income taxes, and Mobe's effective income tax rate was 30%.
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