Question

Compare two alternatives, A and B. on the basis of a present worth evaluation using /= 10% per year and a study period of 8 years. Alternative A B First Cost $-19,000 $-46,000 Annual Operating Cost $-6,000 $-10,000 Overhaul in Year 4 $0 $-3,850 Salvage Value $1,200 $6,200 Life 8 years 4 years The present worth of alternative A is $ and that of alternative B is $ Alternative (Click to select) is selected.

Answer 1

I = 10%

PW OF ALTERNATIVE A:

PW = FIRST COST + AOC(P/A,I,N) + SALVAGE VALUE IN YEAR 4(P/F,I,N) + FIRST COST IN YEAR 4(P/F,I,N) + SALVAGE VALUE IN YEAR 8(P/F,I,N)

PW = -19,000 - 6,000(P/A,10%,8) + 1,200(P/F,10%,4) - 19,000(P/F,10%,4) + 1,200(P/F,10%,8)

PW = -19,000 - 6,000 * 5.335 + 1,200 * 0.683 - 19,000 * 0.683 + 1,200 * 0.4665

PW = - 19,000 - 32,010 + 819.6 - 12,977 + 559.8

PW = - 62,607.6

PW OF ALTERNATIVE B:

PW = FIRST COST + AOC(P/A,I,N) + OVERHAUL IN YEAR 4(P/F,I,N) + SALVAGE VALUE IN YEAR 8(P/F,I,N)

PW = - 46,000 - 10,000(P/A,10%,8) - 3,850(P/F,10%,4) + 6,200(P/F,10%,8)

PW = -46,000 - 10,000 * 5.335 - 3,850 * 0.683 + 6,200 * 0.4665

PW = - 49,000 - 53,350 - 2,629.55 + 2,892.3

PW = - 99,087.25

SINCE THE PW OF ALTERNATIVE A IS MORE THEN THAT OF ALTERNATIVE B , SO ALTERNATIVE A IS SELECTED.