Question

Two mutually exclusive design alternatives are being considered. The estimated cash flows for each alternative are given in the following table with MARR = 10% per year. Suggest your recommendation by using multiple attribute annual worth AW analysis. Design A Design B Investment cost (RM) 28,000 55,000 One-off expenses 10,000 13,000 In year 4 (RM) Annual revenues (RM) 22,000 28,000 Market value (RM) 6,000 8,000 Useful life 10 years 6 years

USE ANNUAL WORTH Analysis

Answer 1

Solution :-

B A 1 Solution - н Year 0 5 Cash Outflows Cash Inlows Net Cashflows PVF @ 10% -28,000 -28,000 0.909 22,000 22,000 0.826 22,000 22,000 0.751 22,000 22,000 0.683 -10,000 22,000 12,000 0.621 22,000 22,000 0.564 22,000 22,000 0.513 22,000 22,000 0.467 22,000 22,000 0.424 22,000 22,000 0.386 28,000 28,000 0.350 PV -25454.545 18181.818 16528.926 15026.296 7451.056 12418.426 11289.479 10263.162 9330.148 8481.952 9813.829 13 9 10 15 16 Total 6.495 93330.547 Year 0 Cash Outflows Cash Inlows Net Cashflows PVF @ 10% -55,000 -55,000 0.909 28,000 28,000 0.826 28,000 28,000 0.751 28,000 28,000 0.683 -13,000 28,000 15,000 0.621 28,000 28,000 0.564 36,000 36,000 0.513 PV -50000.000 23140.496 21036.814 19124.377 9313.820 15805.270 18473.692 Total 4.868 5 6894.469

A 1 Solutio Cash Inlows 3 Year Cash Outflows 40 -28000 5 1 6 2 73 -10000 Net Cashflows PVF @10% =B4 =1/1.1 =C5 =E4/1.1 =C6 =E5/1.1 =C7 =E6/1.1 =B8+C8 =E7/1.1 =C9 =E8/1.1 =C10 =E9/1.1 =C11 =E 10/1.1 =C12 =E11/1.1 =C13 =E12/1.1 =C14 1=E13/1.1 22000 22000 22000 22000 22000 22000 22000 22000 22000 28000 PV =D4*E4 =D5 E5 =D6*E6 =D7*E7 =D8*E8 =D9E9 =D10*E10 =D11*E11 =D12*E12 =D13*E13 =D14*E14 106 117 128 13 9 14 10 Total =SUM(E4:E14) =SUM(F4:F14) 17 18 PV 19 Year 200 21 1 22 2 23 3 | 24 4 Cash Outflows Cash Inlows -55000 28000 28000 28000 -13000 28000 Net Cashflows =B20 =C21 =C22 =C23 =B24+C24 =C25 =C26 PVF @ 10% =1/1.1 =E20/1.1 =E21/1.1 =E22/1.1 =E23/1.1 =E24/1.1 =E25/1.1 =D20 E20 =D21*E21 =D22*E22 =D23E23 =D24*E24 =D25*E25 =D26*E26 28000 36000 Total =SUM(E20:E26) =SUM(F20:F26)

As we see here the useful life of both the projects are not same so the Decision between these two can be made by annual worth Analysis

Annual Worth ( AW ) = Design A = Present Value of Cash flows / PVAF ( i,n)

AW of Design A = $93,330.547 / 6.495 = $14,369.46

AW of Design B = $56,894.47 / 4.868 = $11,686.44

As the Annual worth of Net Present Value of Design A is Greater so Accept Design A

If there is any doubt please ask in comments