Question

Dertermine which of the two following cash flows is preferable, using a MARR of 12%. You can use any method you prefer and may assume repeatability is an acceptable assumption. Option A requires an initial investment of $35000 and produces for five years an annual return of $9400. The salvage value at five years is expected to be $5000. Option B requires an initial investment of $50000 and produces an annual return for seven years of 10300. The salvage value at seven years is expected to be $10700. please show the solution not in excel and draw the cash flow

Answer 1

Given,

MARR = 12% per year

From the compound interest factor tale, we obtain

(A/P, 12%, 5) = 0.2774

(A/F, 12%, 5) = 0.1574

(A/P, 12%, 7) = 0.2191

(A/F, 12%, 7) = 0.0991

Option A:

Initial investment = -$35,000

Annual returns = $9,400

Salvage value = $5,000

Useful life = 5 years

Annual worth of option A = AW of the initial investment + Annual returns + AW of the salvage value = -$35,000(A/P, 12%, 5) + $9,400 + $5,000(A/F, 12%, 5) = -$35,000*0.2774 + $9,400 + $5,000*0.1574 = $478

Option B:

Initial investment = -$50,000

Annual returns = $10,300

Salvage value = $10,700

Useful life = 7 years

Annual worth of option A = AW of the initial investment + Annual returns + AW of the salvage value = -$50,000(A/P, 12%, 7) + $10,300 + $10,700(A/F, 12%, 7) = -$50,000*0.2191 + $10,300 + $10,700*0.0991 = $405.37

As the AW of option A is higher than that of option B, select option A.