Question

In: Economics

Consider Projects X and Y. Which project would you approve if a project must be selected?...

Consider Projects X and Y. Which project would you approve if a project must be selected? The expected period of service is 15 years, and the interest rate is 10%. Calculate EUAW for both the projects and compare.

	Project X	Project Y
Initial cost	$100,000	$150,000
Annual operating costs	30,000	20,000
Annual repair costs	10,000	6,000
Salvage value	10,000	20,000

Expert Solution

Ans. Cash flows in,

Year 0 = - Initial Cost

=> For X = -$100000 and for Y = -$150000

Year 1-14 = -(Annual Operating cost+ Annual repair cost)

=> For X = -$40000 and for Y = -$26000

Year 15 = -(Annual Operating cost + Annual repair cost) + Salvage value

=> For X = -$30000 and for Y = -$6000

The present worth of X at 10% interest rate,

PWa = -100000 - 40000*(P/A, 10%, 14) - 26000*(P/F, 10%, 15)

=> PWa = -$401849.26

The present worth of Y at 10% interest rate,

PWb = -150000 - 26000*(P/A, 10%, 14) - 6000*(P/F, 10%, 15)

=> PWb = -$342970.23

For EUAW,

PWa = EUAWa * (P/A, 10%, 15)

=> EUAWa = -$52832.64

For EUAW,

PWb = EUAWb*(P/A, 10%, 15)

=> EUAWb = -$45091.59

Rahul Sunny answered 2 years ago

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