Question

Compare two alternatives, A and B on the basis of a present worth evaluation using i=8% per year and study period of 8 years. Which alternative should be selected based on PW calculation and what is the PW value of the selected alternative?

Show work for both alternatives. No excel.

Alternative	A	B
First cost, $	-15,000	-28,000
Annual operating cost	-6,000	-9,000
Overhaul in year 4	-	-2,000
Salvage value	3,000	5,000
Life, Years	4	8

Answer 1

Alternative-A
Year	Cashflows	PVF @8%	Present value
0	15000	1.000	15000
1	6000	0.926	5555.556
2	6000	0.857	5144.033
3	6000	0.794	4762.993
4	18000	0.735	13230.54
5	6000	0.681	4083.499
6	6000	0.630	3781.018
7	6000	0.583	3500.942
8	3000	0.540	1620.807
Present value of cash outflows			56,679
Note: In year 4, the salvage will realise and new investment of $15,000 to be made
Alternative-B
Year	Cashflows	PVF @8%	Present value
0	28000	1.000	28000
1	9000	0.926	8333.333
2	9000	0.857	7716.049
3	9000	0.794	7144.49
4	9000	0.735	6615.269
5	9000	0.681	6125.249
6	9000	0.630	5671.527
7	9000	0.583	5251.414
8	4000	0.540	2161.076
Present value of cash outflows			77,018
Note: salvage value is deducted at the end of Year -8
Hence, Alternative A shall be selected as Present value of outflow is $56,679