Question

HP Parameters 1. Initial Cost ($) 2. Revenues ($) Apple Dell 15,000 22,000 45,000 at EOY1 | 43,000 at EOY1 increasing by increasing by $5,000 2.0% annually annually thereafter thereafter 41,000 at EOY1 | 38,000 at EOY1 increasing by decreasing by 1% annually 2% annually thereafter thereafter 26,000 46,000 at EOY1 increasing by $500 annually thereafter 33,000 at EOY1 increasing by 0.5% annually thereafter 3. Operating costs ($) 400 900 4. End-of-life salvage value ($) 5. Useful life (years) 5 10 • EOY = End-of-year Industry standard for backhoes = 4 years • MARR = 10% 1. Apple's Net Present Worth (NPW) (rounded to the nearest $100) of a) $31,600; b) $32,400; c) $35,800; d) $38,300. 2. Dell's NPW (rounded to the nearest $100) is a) $39,300; b) $41,500; c) $43,600; d) $46,100. 3. HP's net worth (rounded to the nearest $100) after 5 years is a) $37,400; b) $42,100; c) $44,800; d) $47,000. 4. Dell's Annual Equivalent Worth (AEW) (rounded to the nearest $100) is a) $6,500; b) $6,800; c) $7,100; d) $7,500. HP's AEW (rounded to the nearest $100) over 30 years (it was repeated several times without changes to its initial parameter values) is a) $6,600; b) $6,900; c) $7,200; d) $7,400. 6. The best computer based on the NPW method is a) Apple; b) Dell; c) HP; d) None of the computers is acceptable.

Answer 1

Working notes:

For each option, Annual net benefit (NAB) = Revenue - Cost

(a) For Apple,

• Starting year 2, Revenue in year N = Revenue in year (N - 1) + 5,000
• Starting year 2, Cost in year N = Cost in year (N - 1) x 1.01

(a) For Apple,

• Starting year 2, Revenue in year N = Revenue in year (N - 1) x 1.02
• Starting year 2, Cost in year N = Cost in year (N - 1) x 0.98
• NAB in year 10 = Revenue - Cost + Salvage value 400

(c) For Dell,

• Starting year 2, Revenue in year N = Revenue in year (N - 1) + 500
• Starting year 2, Cost in year N = Cost in year (N - 1) x 1.005
• NAB in year 10 = Revenue - Cost + Salvage value 900

(d) NPW and FW are computed as follows.

APPLE
Year	Revenue	Cost	NAB	PV Factor @10%	Discounted NAB
0		15,000	-15,000	1.0000	-15,000
1	45,000	41,000	4,000	0.9091	3,636
2	50,000	41,410	8,590	0.8264	7,099
3	55,000	41,824	13,176	0.7513	9,899
4	60,000	42,242	17,758	0.6830	12,129
5	65,000	42,665	22,335	0.6209	13,868
				NPW of NAB =	31,632
DELL
Year	Revenue	Cost	NAB	PV Factor @10%	Discounted NAB
0		22,000	-22,000	1.0000	-22,000
1	43,000	38,000	5,000	0.9091	4,545
2	43,860	37,240	6,620	0.8264	5,471
3	44,737	36,495	8,242	0.7513	6,192
4	45,632	35,765	9,867	0.6830	6,739
5	46,545	35,050	11,495	0.6209	7,137
6	47,475	34,349	13,126	0.5645	7,410
7	48,425	33,662	14,763	0.5132	7,576
8	49,393	32,989	16,405	0.4665	7,653
9	50,381	32,329	18,052	0.4241	7,656
10	51,389	31,682	20,107	0.3855	7,752
				NPW of NAB =	46,131
HP
Year	Revenue	Cost	NAB	FV Factor @10%	Compounded NAB
0		26,000	-26,000	1.6105	-41,873
1	46,000	33,000	13,000	1.4641	19,033
2	46,500	33,165	13,335	1.3310	17,749
3	47,000	33,331	13,669	1.2100	16,540
4	47,500	33,497	14,003	1.1000	15,403
5	48,000	33,665	15,235	1.0000	15,235
				FW of NAB =	42,086

(1) (a)

(2) (d)

(3) (b)

(4) (d)

Dell's AEW = NPW / P/A(10%, 10) = 46,131 / 6.1446 = 7,508

NOTE: As HOMEWORKLIB Answering Policy, 1st 4 questions have been answered.