Question

0.5. Two mutually exclusive alternatives for office building refrigeration and air conditioning are being investigated. Their relevant costs and lives are summarized as follows: Absorption Compression Chilling (AC) Chilling (CC) Capital investment, S 60.000 80,000 Annual operating expenses, $ 40,000 32,000 Salvage (market value, $ 12.000 Useful life, years The hurdle rate (MARR) is 15% per year and the study period is 18 years. What is the most efficient approach to identifying the best alternative when they have unequal lives (.e. 6 vs 9) with common multiple (i.e. 18 years)? According to the suggested approach, determine which chilling system should be recommended.

Answer 1

		Best Approach is to find cash flow for common multiple (18 years) Life (assuming repetition of investments
		Calculated Net Present Valuae (NPV) of each Cash flow
		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate=MARR=15%=0.15
		N=Year   of Cash Flow
		CASH FLOW ANALYSIS OF ABSORPTION CHILLING (AC)
	N	Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18
	CF1	Cash Flow1	-$60,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000
	CF2	Cash Flow2							-$60,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000
	CF3	Cash Flow3													-$60,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000
	S	Salvage Values							$12,000						$12,000						$12,000
	CF=CF1+CF2+CF3+S	Net Cash Flow	-$60,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000	-$88,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000	-$88,000	-$40,000	-$40,000	-$40,000	-$40,000	-$40,000	-$28,000	SUM
	PV=CF/(1.15^N)	Present Value	-$60,000	-$34,783	-$30,246	-$26,301	-$22,870	-$19,887	-$38,045	-$15,037	-$13,076	-$11,370	-$9,887	-$8,598	-$16,448	-$6,501	-$5,653	-$4,916	-$4,275	-$3,717	-$2,263	-$333,872
	NPV=Sum of PV	Net Present Value of costs	-$333,872
		CASH FLOW ANALYSIS OF COMPRESSION CHILLING(CC)
	N	Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18
	CF1	Cash Flow1	-$80,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000
	CF2	Cash Flow2										-$80,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000
	S	Salvage Values										$0									$0
	CF=CF1+CF2+S	Net Cash Flow	-$80,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$112,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	-$32,000	SUM
	PV=CF/(1.15^N)	Present Value	-$80,000	-$27,826	-$24,197	-$21,041	-$18,296	-$15,910	-$13,834	-$12,030	-$10,461	-$31,837	-$7,910	-$6,878	-$5,981	-$5,201	-$4,523	-$3,933	-$3,420	-$2,974	-$2,586	-$298,836
	NPV=Sum of PV	Net Present Value of costs	-$298,836
		Compression Chilling (CC) has lower Net Present Cost
		Compression Chilling (CC) is recommended