Question

engineering economy

Two mutually exclusive alternatives are being considered. The MARR is 15% per year. General inflation is 4.5% / year Based on the data below, perform an appropriate analysis to select the most economical alternative. Assume that the market value grows at the general inflation rate. Alternative A Alternative B 51700D5240,000 Initial investment Annual revenue (actual $) $43,000 $48,000 $3,000 in year 1 increasing by $300 each year for remaining years Annual cost (actual S) $4,000 Market value at end of useful life (year 0 $)$25,000 Useful life, years $38,000 Click the icon to view the interest and annuity table for discrete compounding when i-15% per year. The AW of Altermative A is (Round to the nearest dollar.)

The AW of Alternative A is?

The AW of Alternative B is?

Answer 1

		ANALYSIS OF ALTERNATIVE A
		Present Value (PV)of Cash Flow:
		Cash Flow/((1+i)^N)
		i=discount rate=MARR=15%=0.15
		N=Year of Cash Flow
		Inflation Rate =4.5%=0.045
		Market Value in actual dollar at end Year5	$31,155	(25000*((1.045)^5))
		CASH FLOWS:
	N	Year	0	1	2	3	4	5
	A	Initial Invetment	($170,000)
	B	Annual Revenue		$43,000	$43,000	$43,000	$43,000	$43,000
	C	AnnualCosts		($3,000)	($3,300)	($3,600)	($3,900)	($4,200)
	D	Market Value in actual dollar at end Year5						$31,155
	E=A+B+C+D	Net Cash Flow	($170,000)	$40,000	$39,700	$39,400	$39,100	$69,955	SUM
	PV=E/(1.15^N)	PRESENT Value (PV)of Net Cash Flow:	($170,000)	$34,783	$30,019	$25,906	$22,356	$34,780	($22,157)
	NPV=Sum of PV	Net Present Value	($22,157)
	PMT	Annual Worth	($6,609.78)	(Using PMT function of excel with Rate=15%, Nper=5,Pv=22157)
		Excel Command: PMT(15%,5,22157)
		ANALYSIS OF ALTERNATIVE B
		Market Value in actual dollar at end Year7	$51,713	(38000*((1.045)^7))
		CASH FLOWS:
	N	Year	0	1	2	3	4	5	6	7
	A	Initial Invetment	($240,000)
	B	Annual Revenue		$48,000	$48,000	$48,000	$48,000	$48,000	$48,000	$48,000
	C	AnnualCosts		($4,000)	($4,000)	($4,000)	($4,000)	($4,000)	($4,000)	($4,000)
	D	Market Value in actual dollar at end Year5								$51,713
	E=A+B+C+D	Net Cash Flow	($240,000)	$44,000	$44,000	$44,000	$44,000	$44,000	$44,000	$95,713	SUM
	PV=E/(1.15^N)	PRESENT Value (PV)of Net Cash Flow:	($240,000)	$38,261	$33,270	$28,931	$25,157	$21,876	$19,022	$35,982	($37,501)
	NPV=Sum of PV	Net Present Value	($37,501)
	PMT	Annual Worth	($9,013.70)	(Using PMT function of excel with Rate=15%, Nper=7,Pv=37501)
		Excel Command: PMT(15%,7,37501)
		The AW of Alternative A is	($6,609.78)
		The AW of Alternative B is	($9,013.70)