Question

An industrial engineer is considering two assets to be purchased by a company. Asset A will have an initial cost of $90,000, an annual operating and maintenance cost of $32,000, and a $6,000 salvage value. Asset B will have a first cost of $135,000, an annual operating and maintenance cost of $25,000, and a $17,500 salvage value. Which one should be selected? Use a 15-year study period and an annual interest rate of 8%. Draw the cash flow diagrams. Always use factor notation.

Answer 1

Alternative 1 :

Year	Investment ($)	Annual Expenses ($)	Salvage ($)	PV Factor	PV ($)
-	-90,000			1.000
1	-90,000	-32,000	6,000	0.926	1,07,407.407
2	-90,000	-32,000	6,000	0.857	99,451.303
3	-90,000	-32,000	6,000	0.794	92,084.540
4	-90,000	-32,000	6,000	0.735	85,263.463
5	-90,000	-32,000	6,000	0.681	78,947.651
6	-90,000	-32,000	6,000	0.630	73,099.677
7	-90,000	-32,000	6,000	0.583	67,684.886
8	-90,000	-32,000	6,000	0.540	62,671.191
9	-90,000	-32,000	6,000	0.500	58,028.880
10	-90,000	-32,000	6,000	0.463	53,730.445
11	-90,000	-32,000	6,000	0.429	49,750.412
12	-90,000	-32,000	6,000	0.397	46,065.196
13	-90,000	-32,000	6,000	0.368	42,652.959
14	-90,000	-32,000	6,000	0.340	39,493.481
15	-90,000	-32,000	6,000	0.315	36,568.038
					9,92,899.528

Alternative 2 :

Year	Investment ($)	Annual Expenses ($)	Salvage ($)	PV Factor	PV ($)
-	-1,35,000			1.000
1	-1,35,000	-25,000	17,500	0.926	1,31,944.444
2	-1,35,000	-25,000	17,500	0.857	1,22,170.782
3	-1,35,000	-25,000	17,500	0.794	1,13,121.094
4	-1,35,000	-25,000	17,500	0.735	1,04,741.754
5	-1,35,000	-25,000	17,500	0.681	96,983.106
6	-1,35,000	-25,000	17,500	0.630	89,799.172
7	-1,35,000	-25,000	17,500	0.583	83,147.381
8	-1,35,000	-25,000	17,500	0.540	76,988.316
9	-1,35,000	-25,000	17,500	0.500	71,285.478
10	-1,35,000	-25,000	17,500	0.463	66,005.072
11	-1,35,000	-25,000	17,500	0.429	61,115.807
12	-1,35,000	-25,000	17,500	0.397	56,588.711
13	-1,35,000	-25,000	17,500	0.368	52,396.954
14	-1,35,000	-25,000	17,500	0.340	48,515.698
15	-1,35,000	-25,000	17,500	0.315	44,921.943
					12,19,725.713

Cash Flow Diagrams for comparison between both alternatives
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