Question

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. Alternative C D First Cost $-36,000 $-29,000 AOC, per Year $-10,000 $-5,500 Annual Increase in Operating Cost, per Year $-800 $-1,000 Salvage Value $7,000 $800 Life, Years 10 5 The present worth of alternative C is $ and that of alternative D is $ . offers the lower present worth analysis.

Answer 1

i = 8%

study period = 10 years

Alternative C

Present worth = -36000 -10000*(P/A,8%,10) - 800*(P/G,8%,10) + 7000 *(P/F,8%,10)

= -36000 -10000*6.710081 - 800*25.976831 + 7000 *0.463193

= -120639.92

Alternative D

Alternative will be reinvested in EOY5 and cash flow will be repeated from EOY 6 to EOY 10

Present worth = -29000 -5500*(P/A,8%,5) - 1000*(P/G,8%,5) + 800 *(P/F,8%,5) - 29000*(P/F,8%,5) -5500*(P/A,8%,5)*(P/F,8%,5) - 1000*(P/G,8%,5)*(P/F,8%,5) + 800 *(P/F,8%,10)

= -29000 - 5500*3.99271 - 1000*7.372425 + 800 *0.680583 - 29000*0.680583 -5500*3.99271*0.680583 - 1000*7.372425*0.680583 + 800 *0.463193

= -97117.31

Alternative D should be selected as it has lower present cost