Question

Company B must choose one of two methods for its validation activity. Based on the information below, perform an AW analysis and make recommendation. MARR is 10% per year compounded quarterly. Please use the AW analysis.

Method	X	Y
Initial Cost	100,000	250000
Annual Operation Cost	30,000 in year one increasing by 5000 each year	200,00
Salvage Value	0	0
Estimated Life in Year	3	6

Please see below correct answer. How do you get this? Use Excel.

	X	Y
FV
PMT	($75,152.98)	($78,044.72)
	Winner

Answer 1

	Method X
		1.1
	a	b	a*b
Year	Outflows	PV factor 10% [1/(1+r)^n]	PV
0	(100,000.00)	1.000	(100,000.00)
1	(30,000.00)	0.909	(27,272.73)
2	(35,000.00)	0.826	(28,925.62)
3	(40,000.00)	0.751	(30,052.59)
Total		2.487	(186,250.94)
Total Pv of outflow (a)			(186,250.94)
Total PV factor for the period (b)			2.487
Equivalent annual cost (a/b)			(74,894.26)

	Method Y
		1.1
	a	b	a*b
Year	Outflows	PV factor 10% [1/(1+r)^n]	PV
0	(250,000.00)	1.000	(250,000.00)
1	(20,000.00)	0.909	(18,181.82)
2	(20,000.00)	0.826	(16,528.93)
3	(20,000.00)	0.751	(15,026.30)
4	(20,000.00)	0.683	(13,660.27)
5	(20,000.00)	0.621	(12,418.43)
6	(20,000.00)	0.564	(11,289.48)
		4.355	(337,105.21)
Total Pv of outflow (a)			(337,105.21)
Total PV factor for the period (b)			4.355
Equivalent annual cost (a/b)			(77,401.85)

Notes:
1. In total PV factor 1 should be deducted since 0th year factor will not be taken
2. Values has small difference since the PV factor digits may vary

Conclusion

Since method X has lowest equivalent annual cost it is the clear winner.