Question

13. 5.43 Consider the cash flows for two types of models given in Table 25.43 Table P5.43 4:19 PM + Fit to pas n 0 - Model A $8,000 Model B -$15,000 $3,500 $10,000 $3,500 $10,000 $3.500 Table P5.43 Full Alternative Text Both models will have no salvage value upon their disposal (at the end of their respective service lives). The firm's MARR is known to be 1296 1. Notice that the models have different service lives. However, model A will be available in the future with the same cash flows, whereas Model B is available at one time only. If you select model B now, you will have to replace it with model A at the end of year 2. If your firm uses the present worth as a decision criterion, which model should be selected, assuming that the firm will need either model for an indefinite period? 2. Suppose that your firm will need either model for only two years. Determine the salvage value of model A at the end of year 2 that makes both models indifferent (equally likely).

Answer 1

a decision Creteria, Present worth (NPV) as model A yeur cash flow 1 B 3500 13500 $ 3560 PV @ 12 y. 3125 2790 248L 8 8406 Metal Cach Puflow Net Present velue / Net Present worth Inflow - Outflow 2) 8 8406-8000 = $406. Model Bar year Cash low 810000 $10000 PV @ 127. 8928 7972 8 1690o. Cash folklows Turlow Outflow Net Cash Pullow / Nev/ Net Present worth a $16900 - 15000 2 & 1900 Hence, from Seems model A. which the Nel Present Worth creteria it is that Model B is more appropriate than Because in model B , Net worth & 1900 is higher than model Ai Hence, firm need to choose model B as frekence

10 make the Tute model NPV / Net Present worth rudifferent of both Modele should be Same Model B Net Present worth for a year & $ 1900 Noler Model A Net hence we 2 year end Precent worth should be $ 1900 have recaladate the value for Model A year cash flow 83500 $ 3500 2 Pu@129. 3125 2790 $S915 Inflowe. outflow. 8000 We required, a Present wooble Inflou Inflow z Inflow outflow + Net 80oot 1900 9900 2 Extra current fuflow required after pv factor & 9900-5915 -) $3985 cash flow at the end of a year will be - 3985 *4+1} Calvage volue) Refore Net Worth ?) $ 9999.