Question

Investor X has 7,000 to spend on the following three projects. Use the AW method to determine which of these independent investments are financially acceptable at 6% per year compounded monthly interest rate.

Option	Installed Cost	Return per month
A	4500	220
B	3000	200
C	2200	140

Lifelong period. Use CC=AW/i to get present worth

See Below Answer. How do you get this answer?

P5
PP-Month	done by instrutor
CP-Month	done by instrutor
Time Window - Month
A	$                   39,500.00	done by instrutor
B	$                   37,000.00	done by instrutor
C	$                   25,800.00	done by instrutor
A,C	$                   65,300.00	Winner
B,C	$                   62,800.00

Answer 1

Amount available for investment             = 7000

Hurdle rate, i                                                      = 6% per annum compounded monthly

Compounding Period CP                               = 1 month

Total compounding periods in an year    = 12 months

The table containing additional information is shown below

Cost of the projects undertaken should be less than or equal to 7000

Thus, B+C (5200 installed cost) and A+C (6700) are the only feasible combinations whereas A+B (7500) is not.

Out of the two feasible combinations, B+C combination will lead to a total present worth of 37,000+25800 = 62,800 whereas A+C combination will lead to a totalpresent worth of 39500+25800 = 65,300.

Thus, investor X needs to choose A and C options to maximise present worth under the given constraint of 7000 investment amount