Abel and Family Perfumes wants to add one or more of four new products to its current line of co­lognes. Historically, Abel has used a 5-year project recovery period and a MARR of 20% per year. (a) Determine which of the four options the company should undertake on the basis of a present worth analysis, provided the total amount of investment capital available is $800,000. Use a hand solution, unless assigned otherwise. (b) What products are selected if the investment limit is increased to $900,000? Use a spreadsheet, unless assigned oth­erwise. (All cash flows are in $1000 units.)

Question

Answer 1

(a) By hand:

Of the 2? = 16 possible bundles, 7 are within the $800,000 limit:

DN, R1, S2, T3, U4, R1 & S2, and R1 & T3. (Values are in $1000 units.)



PWDN = $0



PWR1 = -200 + (150 – 50)(P/A,20%,5)

= -200 + 100(2.9906)

= $99.06 ($99,060)



PWS2 = -400 + (450 – 200)(P/A,20%,5)

= -400 + 250(2.9906)

= $347.650 ($347,650)

PWT3 = -500 + (520 – 300)(P/A,20%,5)

= -500 + 220(2.9906)

= $157.932 ($157,932)



PWU4 = -700 + (770 – 400)(P/A,20%,5)

= -700 + 370(2.9906)

= $406.522 ($406,522)



PWR1,S2 = 99.060 + 347.650

= $446.710 ($446,710)



PWR1,T3 = 99.060 + 157.932

= $256.992 ($256,992)



Select product lines R1 and S2 with the largest PW = $446,710



(b) By spreadsheet:



$800,000 limit: Select product lines R1 and S2 with PW = $446,714 (column G)

$900,000 limit: Either products R1 and U4 or S2 and T3 can be selected as their PW

values are (essentially) the same at $505,588 (columns I and J)