Question

Based on what you have learned in Module 2 (Charter 5 and 6), please describe your approach at solving the following two scenarios. This should include selection of the appropriate method (present worth analysis or annual cash flow analysis), reasoning behind your selection (advantages vs. disadvantages), and the point in time selected and their corresponding reasons: 1. Use a 10-year analysis period and an interest rate of 8%, determine which alternative should be selected. Alternative A Alternative B First Cost $ 6,350 $11,750 Uniform Annual Benefit $1,925 $2,000 Useful Life 2 5 2. Using an interest rate of 5%, determine the value of T. End of Year Operating Cost Income $650 2.25 T

Answer 1

1.

For this problem, my approach will be to use present worth analysis methods with LCM (least common multiple) approach to calculate the present worth of alternative. This LCM method will be used to make equal lives of both the alternatives that should be 10 years and as demanded by the problem. It is important to be done, because Present worth method cannot be used when lives are unequal.

R = 8%

Time n = 10 years

PW of alternative A = (-6350 - 6350*(P/F, 8%. 2) - 6350*(P/F, 8%. 4) - 6350*(P/F, 8%. 6) - 6350*(P/F, 8%. 8)) + 1925*(P/A, 8%, 10)

PW of alternative A = (-6350 - 6350*.8573 - 6350*.7350 - 6350*.6302 - 6350*.5403) + 1925*6.71

PW of alternative A = -$10977

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PW of alternative B = -11750 - 11750*(P/F, 8%, 5) + 2000*(P/A, 8%, 10)

PW of alternative B = -11750 - 11750*.6806 + 2000*6.71

PW of alternative B = -$6327.05

Since the PW of alternative B is more cost effective than that of alternative A, so alternative B should be selected.

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