Question

The cash flows in the table below represent the potential annual savings associated with two different types of production​processes, each of which requires an i

The cash flows in the table below represent the potential annual savings associated with two different types of production processes, each of which requires an investment of $31,000. Assume an interest rate of 6%. Click the icon to view the data for cash flows Click the icon to view the interest factors for discrete compounding when i-6% per year (a) Determine the equivalent annual The equivalent annual savings for pro More Info Process A - $31,000 $16,010 $14,530 $13,050 $11,570 Process B - $31,000 $19,700 $19,700 $19,700 $19,700 2 4 Print Done

Answer 1

Present Worth (PW) of annual savings is computed as follows.

PW, Process A ($) = -31,000 + 16,110 x P/F(6%, 1) + 14,530 x P/F(6%, 2) + 13,050 x P/F(6%, 3) + 11,570 x P/F(6%, 4)

= -31,000 + 16,110 x 0.9434** + 14,530 x 0.8900** + 13,050 x 0.8396** + 11,570 x 0.7921**

= -31,000 + 15,198 + 12,932 + 10,957 + 9,165

= 17,252

PW, Process B ($) = -31,000 + 19,700 x P/A(6%, 4) = -31,000 + 19,700 x 3.4651** = -31,000 + 68,262 = 37,262

Therefore,

Equivalent Annual savings, Process A ($) = PW of Process A / P/A(6%, 4) = 17,252 / 3.4651** = 4,978.79 ~ 4,979

Equivalent Annual savings, Process B ($) = PW of Process B / P/A(6%, 4) = 37,262 / 3.4651** = 10,753.51 ~ 10,754

**From P/F and P/A Factor tables