Question

Four mutually exclusive alternatives are being evaluated, and their costs and revenues are itemized below. a. If the MARR is 15% per year and the analysis period is 12 years, use the PW method to determine which alternatives are economically acceptable and which one should be selected. b. If the total capital investment budget available is $200,000, which alter- native should be selected? Capital investment Annual revenues less expenses Market value (end of useful life) Useful life (years) Mutually Exclusive Alternative 11 III IV $100,000 $152,000 $184,000 $220,000 15,200 31,900 35,900 41,500 10,000 0 15,000 20,000 12 12 12 12

c. If the total capital investment budget is $150,000 , which alternative should be selected ?

d.If the total capital investment budget available is $200,000 , which alternative should be selected ( if the alternatives are independent ) ?

Answer 1

(a)

PW, Alt I = - 100,000 + 15,200 x P/A(15%, 12) + 10,000 x P/F(15%, 12)

= - 100,000 + 15,200 x 5.4206 + 10,000 x 0.1869

= - 100,000 + 82,393 + 1,869

= - 15,738

PW, Alt II = - 152,000 + 31,900 x P/A(15%, 12) + 0 x P/F(15%, 12)

= - 152,000 + 31,900 x 5.4206

= - 152,000 + 172,917

= 20,917

PW, Alt III = - 184,000 + 35,900 x P/A(15%, 12) + 15,000 x P/F(15%, 12)

= - 184,000 + 35,900 x 5.4206 + 15,000 x 0.1869

= - 184,000 + 194,600 + 2,804

= 13,404

PW, Alt IV = - 220,000 + 41,500 x P/A(15%, 12) + 20,000 x P/F(15%, 12)

= - 220,000 + 41,500 x 5.4206 + 20,000 x 0.1869

= - 220,000 + 224,955 + 3,738

= 8,693

Since Alt II has highest PW, Alt II is best option.

(b)

Alt II has first cost less than $200,000 and it has highest PW as well. So Alt II is best option.

(c)

When budget is $150,000, Alt II, III and IV cannot be chosen since each has first cost higher than budget. Alt I cannot be chosen since it has negative PW. So no option can be selected.

(d)

Alt II has first cost less than $200,000 and it has highest PW as well. So Alt II is best option.