ASSIGNMENT 3

1. Compute the net cash flow for each alternative.

End
of

Income

Alternative 1
Cost ($)

($)

Year

Net

Income

cash

($)

Alternative 2
Cost ($)

cash

flow ($)
-3
-2
-1
0

1
2
3
4
5
6
7

64,000
96,000
128,000
144,000
144,000
144,000
144,000

8
9
10

144,000
144,000
140,000
+

160,000
2,500
2,500
170,000
+ 2,500
5,000
5,000
5,000
5,000
5,000
5,000
200,000
+ 2,500
5,000
5,000

Net

flow ($)
160,000

48,000
72,000
96,000
108,000
108,000
108,000
108,000
108,000
108,000
78,000 +

160,000
2,500
2,500
300,000
+ 2,500
3,800
3,800
3,800
3,800
3,800
3,800
3,800
3,800
3,800

108,000

144,000
+ 34,000
2. Draw the net cash flow diagram for each alternative.
Alternative 1

Alternative 2

3. Which alternative should the company choose based on the PW and AW

analysis?

4. What should the price of the product be under each alternative to make
the AW equal to 0.
5. Suppose that the cost of variable cost doubles. Would this make the model
800 machine more or less desirable? Explain. No computations are
needed.