Question

In: Economics

Compare the alternatives C and D on the basis of a present worth analysis using an...

Compare the alternatives C and D on the basis of a present worth analysis using an interest rate of 8% per year and a study period of 10 years. Which alternative should be selected and what is the PW of the selected alternative?

Show steps for finding both alternatives. No excel.

Alternative

C

D

First cost, $

-40,000

-32,000

Annual operating cost/year

-7,000

-3,000

Annual increase in operating cost per year

-1000

0

Salvage value

9000

500

Life, Years

10

5

Solutions

Expert Solution

Alternative-C
Year Cashflows PVF @8% Present value
0 40000 1.000 40000
1 7000 0.926 6481.481
2 8000 0.857 6858.711
3 9000 0.794 7144.49
4 10000 0.735 7350.299
5 11000 0.681 7486.415
6 12000 0.630 7562.036
7 13000 0.583 7585.375
8 14000 0.540 7563.764
9 15000 0.500 7503.735
10 7000 0.463 3242.354
Present value of cash outflows 108,779
Note: In year 10, salvage value is deducted from Annual operating cost
Alternative-D
Year Cashflows PVF @8% Present value
0 32000 1.000 32000
1 3000 0.926 2777.778
2 3000 0.857 2572.016
3 3000 0.794 2381.497
4 3000 0.735 2205.09
5 34500 0.681 23480.12
6 3000 0.630 1890.509
7 3000 0.583 1750.471
8 3000 0.540 1620.807
9 3000 0.500 1500.747
10 2500 0.463 1157.984
Present value of cash outflows 73,337
Note: In year-5, annual operating and investment is cash outlflow as reduced by salvage value
Note: In year-10, salvage value is reduced from annual operating cost
Hence, Alternative D shall be selected as Present value of outflow is $73,337

Rahul Sunny answered 1 year ago
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