Question

Company A plans to replace with one of their current equipment with one of the three options shown in the table.

Option	A	B	C
Initial Cost	200	350	475
Annual Operation Cost	450	275	300
Salvage Value	75	60	80
Estimated Life in Year	20	20	20

Perform AW analysis to figure out which option should company A choose. The rate of return is 8% per year compounded Monthly. Please see correct answer below how do you get this?

Time Window - Year
	A	B	C
PMT	($469.24)	($310.18)	($347.77)
		Winner

Answer 1

	Option A
		1.08
	a	b	a*b
Year	Outflows	PV factor 8% [1/(1+r)^n]	PV
0	(200.00)	1.00	(200.00)
1	(450.00)	0.93	(416.67)
2	(450.00)	0.86	(385.80)
3	(450.00)	0.79	(357.22)
4	(450.00)	0.74	(330.76)
5	(450.00)	0.68	(306.26)
6	(450.00)	0.63	(283.58)
7	(450.00)	0.58	(262.57)
8	(450.00)	0.54	(243.12)
9	(450.00)	0.50	(225.11)
10	(450.00)	0.46	(208.44)
11	(450.00)	0.43	(193.00)
12	(450.00)	0.40	(178.70)
13	(450.00)	0.37	(165.46)
14	(450.00)	0.34	(153.21)
15	(450.00)	0.32	(141.86)
16	(450.00)	0.29	(131.35)
17	(450.00)	0.27	(121.62)
18	(450.00)	0.25	(112.61)
19	(450.00)	0.23	(104.27)
20	(375.00)	0.21	(80.46)
Total		9.82	(4,602.08)
Total Pv of outflow (a)			(4,602.08)
Total PV factor for the period (b)			9.82
Equivalent annual cost (a/b)			(468.73)

	Option B
		1.08
	a	b	a*b
Year	Outflows	PV factor 8% [1/(1+r)^n]	PV
0	(350.00)	1.00	(350.00)
1	(275.00)	0.93	(254.63)
2	(275.00)	0.86	(235.77)
3	(275.00)	0.79	(218.30)
4	(275.00)	0.74	(202.13)
5	(275.00)	0.68	(187.16)
6	(275.00)	0.63	(173.30)
7	(275.00)	0.58	(160.46)
8	(275.00)	0.54	(148.57)
9	(275.00)	0.50	(137.57)
10	(275.00)	0.46	(127.38)
11	(275.00)	0.43	(117.94)
12	(275.00)	0.40	(109.21)
13	(275.00)	0.37	(101.12)
14	(275.00)	0.34	(93.63)
15	(275.00)	0.32	(86.69)
16	(275.00)	0.29	(80.27)
17	(275.00)	0.27	(74.32)
18	(275.00)	0.25	(68.82)
19	(275.00)	0.23	(63.72)
20	(215.00)	0.21	(46.13)
Total		9.82	(3,037.12)
Total Pv of outflow (a)			(3,037.12)
Total PV factor for the period (b)			9.82
Equivalent annual cost (a/b)			(309.34)

	Option C
		1.08
	a	b	a*b
Year	Outflows	PV factor 8% [1/(1+r)^n]	PV
0	(475.00)	1.00	(475.00)
1	(300.00)	0.93	(277.78)
2	(300.00)	0.86	(257.20)
3	(300.00)	0.79	(238.15)
4	(300.00)	0.74	(220.51)
5	(300.00)	0.68	(204.17)
6	(300.00)	0.63	(189.05)
7	(300.00)	0.58	(175.05)
8	(300.00)	0.54	(162.08)
9	(300.00)	0.50	(150.07)
10	(300.00)	0.46	(138.96)
11	(300.00)	0.43	(128.66)
12	(300.00)	0.40	(119.13)
13	(300.00)	0.37	(110.31)
14	(300.00)	0.34	(102.14)
15	(300.00)	0.32	(94.57)
16	(300.00)	0.29	(87.57)
17	(300.00)	0.27	(81.08)
18	(300.00)	0.25	(75.07)
19	(300.00)	0.23	(69.51)
20	(220.00)	0.21	(47.20)
Total		9.82	(3,403.28)
Total Pv of outflow (a)			(3,403.28)
Total PV factor for the period (b)			9.82
Equivalent annual cost (a/b)			(346.63)

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 can vary
3. Salvage values should be added with 20th year outflow, since its an income
Conclusion
Since option B has lowest equivalent annual cost it is the clear winner.