NPV & EAC Questions

A construction company has two alternative schemes to improve their property portfolio. Scheme ‘A’ involves a complete modernisation of buildings which will cost £2,500,000 now. Annual operation and maintenance charges will amount to £125,000 per year.

Scheme ‘B’ would involve investing £1,000,000 now and the remainder of the work carried out in 5 years’ time at a cost of £1,700,000. In this alternative scenario, annual operating and maintenance charges will be £150,000 per year for the first 5 years and

£125,000 per year thereafter.

For this purpose, you are required to calculate the Net Present Value (NPV) and the Equivalent Annual Cost (EAC) for both schemes and advise the client on the most appropriate option. Assume an annual interest rate of 7% and an assert life of 30 years for both schemes. Your answer needs to clearly illustrate the calculations and a brief explanation as to which option should be prioritised and why.