Homework Answers
This question is related to evaluation of alternatives having unequal lives. However, it is clearly mentioned that the Alternative B is not replaced. It means repeatability method cannot be applicable. Evaluating the investment opportunites by taking their original life using the Present Worth Method.
MARR = 10%
|
Present Worth of A |
Present Worth of B |
|
First Cost = 150 Uniform annual benefit = 25 Salvage Value = 20 Life = 15 years PW = -150 + 25 (P/A, 10%, 15) + 20 (P/F, 10%, 15) PW = -150 + 25 (7.60608) + 20 (0.23939) PW = 44.94 |
First Cost = 100 Uniform annual benefit = 22.25 Salvage Value = 00 Life = 10 years PW = -100 + 22.25 (P/A, 10%, 10) PW = -100 + 22.25 (6.14457) PW = 36.72 |
As per the PW method, the Investment Opportunity – A should be selected because of highest present worth.
Alternatively
Here we can use the incremental cash flow approach also. Calculate the incremental cash flow between the alternative A – B
|
Year |
A |
B |
A-B |
|
0 |
-150 |
-100 |
-50 |
|
1 |
25 |
22.25 |
2.75 |
|
2 |
25 |
22.25 |
2.75 |
|
3 |
25 |
22.25 |
2.75 |
|
4 |
25 |
22.25 |
2.75 |
|
5 |
25 |
22.25 |
2.75 |
|
6 |
25 |
22.25 |
2.75 |
|
7 |
25 |
22.25 |
2.75 |
|
8 |
25 |
22.25 |
2.75 |
|
9 |
25 |
22.25 |
2.75 |
|
10 |
25 |
22.25 |
2.75 |
|
11 |
25 |
0 |
25 |
|
12 |
25 |
0 |
25 |
|
13 |
25 |
0 |
25 |
|
14 |
25 |
0 |
25 |
|
15 |
25+10 |
0 |
35 |
Calculate PW of the Incremental Cash Flow.
PW = -50 + 2.75 (P/A, 10%, 10) + 25 (P/A, 10%, 5) (P/F, 10%, 10) + 10 (P/F, 10%, 15)
PW = -50 + 2.75 (6.14457) + 25 (3.79079) (0.38554) + 10 (0.23939)
PW = 5.83
PW between (A – B) > 0, Select A
Add Answer to:
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