Question

Copmare the following 2 altrernatives using the Net Equivalent Uniform Annual method

Alt.	Construction cost $	Benefit ($/yr)	Salvage $	Service Life (yrs)
A	1,500,000	300,000	40,000	7
B	2,300,000	450,000	80,000	14

interest rate 3 % year

Answer 1

Alternative A

Construction cost = $1,500,000

Benefit = $300,000 per year

Salvage value = $40,000

Service life = 7 years

Interest rate = 3%

Calculate the Net Equivalent Uniform Annual Worth -

NEUAW = -1,500,000(A/P, 3%, 7) + $300,000 + $40,000(A/F, 3%, 7)

NEUAW = (-$1,500,000 * 0.16051) + $300,000 + ($40,000 * 0.13051)

NEUAW = -$240,765 + $300,000 + $5,220.4

NEUAW = $64,455.40

The net equivalent uniform annual worth of alternative A is $64,455.40

Alternative B

Construction cost = $2,300,000

Benefit = $450,000 per year

Salvage value = $80,000

Service life = 14 years

Interest rate = 3%

Calculate the Net Equivalent Uniform Annual Worth -

NEUAW = -2,300,000(A/P, 3%, 14) + $450,000 + $80,000(A/F, 3%, 14)

NEUAW = (-$2,300,000 * 0.08853) + $450,000 + ($80,000 * 0.05853)

NEUAW = -$203,619 + $450,000 + $4,682.4

NEUAW = $251,063.4

The net equivalent uniform annual worth of alternative B is $251,063.4

The net equivalent uniform annual worth of Alternative B is numerically higher.

So, Alternative B should be chosen.