Question

Engineers for a public utility company have proposed two alternate plans to provide a certain service for the next 15 years. Each plan includes sufficient facilities to take care of the expected growth in demand for the utility service during this period. Plan A calls for a threestage program of investment in facilities: $60,000 will be invested at once, $50,000 more after 5 years, and $40,000 more after 10 years. Plan B calls for an initial investment of $90,000 followed by a $30,000 investment at the end of 8 years. In both plans estimated annual income taxes are 3% of the investment made to date and estimated annual property taxes are 2% of the investment to date. Annual maintenance costs under plan A are estimated to be $1,500 for the first 5 years, $2,500 for the next 5 years and $3,500 for the last 5 years. For plan B these costs are $2,000 for the first 8 years and $3,000 for the last 7. Salvage values at the end of the 15 years are $45,000 and $35,000, respectively, for plans A and B. All things considered, plan B is perceived to have a lower environmental impact. Create a table of cash flows for each plan. Assuming a minimal attractive rate of return of 7%, what is the present worth of both plans and which is preferred?

Answer 1

Plan A	Year	Investment	Investment Till Date	Income Tax	Property Tax	Annual Maintainance cost	Salvage Value	Total Cash Flows	PV Factors	PV @ 7%
	A	B	C	D	E	F	G	H	I	J
				3% Of C	2% Of C			B + D + E + F - G		H x I
	0	60000	60000					60000	1	60000
	1		60000	1800	1200	1500		4500	0.934579	4205.607
	2		60000	1800	1200	1500		4500	0.873439	3930.474
	3		60000	1800	1200	1500		4500	0.816298	3673.34
	4		60000	1800	1200	1500		4500	0.762895	3433.028
	5	50000	110000	3300	2200	1500		57000	0.712986	40640.21
	6		110000	3300	2200	2500		8000	0.666342	5330.738
	7		110000	3300	2200	2500		8000	0.62275	4981.998
	8		110000	3300	2200	2500		8000	0.582009	4656.073
	9		110000	3300	2200	2500		8000	0.543934	4351.47
	10	40000	150000	4500	3000	2500		50000	0.508349	25417.46
	11		150000	4500	3000	3500		11000	0.475093	5226.021
	12		150000	4500	3000	3500		11000	0.444012	4884.132
	13		150000	4500	3000	3500		11000	0.414964	4564.609
	14		150000	4500	3000	3500		11000	0.387817	4265.99
	15		150000	4500	3000	3500	45000	-34000	0.362446	-12323.2
										167238
Plan B	Year	Investment	Investment Till Date	Income Tax	Property Tax	Annual Maintainance cost	Salvage Value	Total Cash Flows	PV Factors	PV @ 7%
	A	B	C	D	E	F	G	H	I	J
				3% Of C	2% Of C			B + D + E + F - G		H x I
	0	90000	90000					90000	1	90000
	1		90000	2700	1800	2000		6500	0.934579	6074.766
	2		90000	2700	1800	2000		6500	0.873439	5677.352
	3		90000	2700	1800	2000		6500	0.816298	5305.936
	4		90000	2700	1800	2000		6500	0.762895	4958.819
	5		90000	2700	1800	2000		6500	0.712986	4634.41
	6		90000	2700	1800	2000		6500	0.666342	4331.224
	7		90000	2700	1800	2000		6500	0.62275	4047.873
	8	30000	120000	3600	2400	2000		38000	0.582009	22116.35
	9		120000	3600	2400	3000		9000	0.543934	4895.404
	10		120000	3600	2400	3000		9000	0.508349	4575.144
	11		120000	3600	2400	3000		9000	0.475093	4275.835
	12		120000	3600	2400	3000		9000	0.444012	3996.108
	13		120000	3600	2400	3000		9000	0.414964	3734.68
	14		120000	3600	2400	3000		9000	0.387817	3490.355
	15		120000	3600	2400	3000	35000	-26000	0.362446	-9423.6
										162690.7
	Plan B Has lower PV of Investments, Therefore it is to be selected.
	Please provide feedback…. Thanks in advance…. :-)