You have been approached by the Managerial Accountant at a leading construction co with the following:
Scenario #1: Purchase of new equipment
Option A: Purchase new equipment now for $300,000
Option B: Pay $120,000 now, $120,000 in 1yr's time, and a further $120,000 in 6 yrs' time.
Scenario #2: Successful Tendering
His firm has put in a bid for 2 contracts. They have won them both. However they only have resources to do one of the projects.
The particulars for the projects are as follows:
Contract Investment Now Cash Flow at the end of:
yr1 yr2 yr3
A $900,000 $195,000 $139,000 $120,000
B $1,100,000 $135,000 $158,000 $180,000
a) He wishes to know what is meant by the term 'Discounted Value'
b) With the appropriate working, which
i) Option should the firm take in scenario 1
ii) Contract should the firm take?