Answer:
The preferred process is that with lower cost which is Additive A with a PV cost of $236,388.89
Explanation:
To determine the preferred process , we compare the present value of the two alternatives and select the lower of the two two cost.
This will be done as follows
Alternative one
Total PV = First payment + PV of annual operating cost
PV of Annuity =A × (1-(1+r)^(-n)/r
A- annual operating cost, r- 20%, n=3
PV of operating cost
= 60,000 × (1- 1.2^(-3))/0.2
= $126,388.89
Total PV = $110,000 + $126,388.89
= $236,388.89
Alternative Two
PV of operating cost
= 35,000 × (1-1.2^(-3))/0.2
= 73,726.85
Total PV = $175,000 + $73,726.85
= $248,726.85
The preferred process is that with lower cost which is Additive A with a PV cost of $236,388.89
