Question

Important,

Two plans are under consideration to provide certain facilities for a public utility.Each plans designed to provide enough capacity during the next 18 years to take care of the expected growth of load during the period regardless of the plan chosen now it is forecast that the facilities will be retired at the end of 18 years and replaced by a new plant of a different type. Plan 1: requires an initial investment of $50000, this will be followed by an investment of $25000 at the end of 9 years. During the first nine years annual disbursements will be $11000, during the final nine years they will be $ 18000. and salvage value is $10000 at the end of 18th year. Plan 2: reqires an initial investment of $30000. This will be followed by an investment of $ 30000 at the end of 6 years and an investment of $20000 at the end of 12 years. during the first 6 years annual disbursements will be $8000, during second 6 years they will be $16000, and final 6 years they will be $25000. they willbe no salvage value at end of 18 year. using interest rate of 9% compare the present worth of the net disbursements and which one is better.

Answer 1

Solution:

Computation of Present value of Net Disbursement
Particulars	Amount	Period	PV Factor	Present Value
Plan A:
Initial investment	$50,000.00	0	1.00000	$50,000
Investment at the end of 9th year	$25,000.00	9	0.46043	$11,511
Annual Disbursement - Year 1 to 9	$11,000.00	1-9	5.99525	$65,948
Annual Disbursement - Year 10 to 18	$18,000.00	10-18	2.76038	$49,687
Salvage Value	-$10,000.00	18	0.21199	-$2,120
Present Value of Cash Outflows				$175,025
Plan B:
Initial investment	$30,000.00	0	1.00000	$30,000
Investment at the end of 6th year	$30,000.00	6	0.59627	$17,888
Investment at the end of 12th year	$20,000.00	12	0.35553	$7,111
Annual Disbursement - Year 1 to 6	$8,000.00	1-6	4.48592	$35,887
Annual Disbursement - Year 7 to 12	$16,000.00	7-12	2.67481	$42,797
Annual Disbursement - Year 13 to 18	$25,000.00	13-18	1.59490	$39,872
Salvage Value	$0.00	18	0.21199	$0
Present Value of Cash Outflows				$173,555

As present value of disbursement under Plan B is lesser than Present value of disbursement under Plan A, therefore Plan A is better.