Question

Use Excel.

AEW-UEL Your company have three mutually exclusive projects which are explained in the table below. You are an engineer and your supervisor asks for your opinion. What is your recommendation and why? What project(s) would you recommend? Initial Investment Annual savings salvage value project life MARR Project A $ 15,000 $ 2,050 $ 3,000 Project B $ 10,000 $ 1,900 $ 2,300 5 6% Project C $ 11,000 $ 1,000 $ 5,000 15 6%| 6%

Answer 1

Solution:

We will compute the Net present value of future cash flows for each project to determine which option is better.

On comparing the Net present value of cash flows from each projects as given below, we can see that Project A is giving better cash flow of $719. Other two projects are creating loss.

Hence Project A is recommended.

Option 1) NPV of cash flows from Project A

MARR	6%		(in $)
Year	Cash flow	PV Formula	Net Present value
0	-15000	=-15000/(1+6%)^0	(15,000.00)
1	2050	=2050/(1+6%)^1	1,933.96
2	2050	=2050/(1+6%)^2	1,824.49
3	2050	=2050/(1+6%)^3	1,721.22
4	2050	=2050/(1+6%)^4	1,623.79
5	2050	=2050/(1+6%)^5	1,531.88
6	2050	=2050/(1+6%)^6	1,445.17
7	2050	=2050/(1+6%)^7	1,363.37
8	2050	=2050/(1+6%)^8	1,286.20
9	5050	=5050/(1+6%)^9	2,989.09
			719.16

Option 2) Cash flows from Project B

MARR	6%		(in $)
Year	Cash flow	PV Formula	Net Present value
0	-10000	=-15000/(1+6%)^0	(10,000.00)
1	1900	=1900/(1+6%)^1	1,792.45
2	1900	=1900/(1+6%)^2	1,690.99
3	1900	=1900/(1+6%)^3	1,595.28
4	1900	=1900/(1+6%)^4	1,504.98
5	4200	=4200/(1+6%)^5	3,138.48
			(277.82)

Option 3: Cash flows from project C

MARR	6%		(in $)
Year	Cash flow	PV Formula	Net Present value
0	-11000	=-11000/(1+6%)^0	(11,000.00)
1	1000	=1000/(1+6%)^1	943.40
2	1000	=1000/(1+6%)^2	890.00
3	1000	=1000/(1+6%)^3	839.62
4	1000	=1000/(1+6%)^4	792.09
5	1000	=1000/(1+6%)^5	747.26
6	1000	=1000/(1+6%)^6	704.96
7	1000	=1000/(1+6%)^7	665.06
8	1000	=1000/(1+6%)^8	627.41
9	1000	=1000/(1+6%)^9	591.90
10	1000	=1000/(1+6%)^10	558.39
11	1000	=1000/(1+6%)^11	526.79
12	1000	=1000/(1+6%)^12	496.97
13	1000	=1000/(1+6%)^13	468.84
14	1000	=1000/(1+6%)^14	442.30
15	6000	=6000/(1+6%)^15	2,503.59
			(4,198.31)