Question

Consider four alternatives, each of which has an 8-year useful life: Initial cost Annual benefit Salvage Value $100 $12.20 $75.00 $80 $12.00 $50.00 $60 $9.70 $50.00 $50 $12.20 $0 a. Construct a plot with interest rate on the x axis and PW on the y axis. Plot the PW vs interest rate for all 4 alternatives. Label graphs and make sure the fonts are readable. If your computer chooses very light colors, please change them to darker or brilliant colors for readability. b. If MARR-896, which project should you choose based upon your plot?

Answer 1

Ans (a) NPV profile is a graph with interest rate on the x-axis and NPV of investment on the y-axis.NPV is the sum of the present values of the cash inflows and outflows.NPV discounts each inflow and outflow to the present and then sums them to see how the values of the inflows compare to the others. A positive NPV means the investment is worthwhile, an NPV of 0 means the inflows equal the outflows and a negative NPV means the investment is not good for the investor. So, the NPV profile can be drawn in the following manner:-

Ans (b) The equivalent present worth (in$) of the four alternatives can be calculated in the following manner:-

PARTICULARS	A	B	C	D
Initial Cost	(100)	(80)	(60)	(50)
Add: PVAF(8%,8years) of Annual Benefits	70.11	68.96	55.75	70.11
Add: PV of Salvage value (PV 8%, 8 Years)	40.5	27	27	0
Present worth	10.61	15.96	22.75	20.11

Since the Present Worth of Alternative C is the highest, hence alternative should be chosen from alternatives A, B, C, and D.