Question

Two mutually exclusive design alternatives are being considered. The estimated cash flows for each alternative are given below. The MARR is 10% per year. A decision maker must select one of these alternatives.

A B

Investment cost $50,000 $30,000

Annual Revenue 15,000 10,000

Salvage value 5,000 3,000

Useful life (yrs.) 5 5

For all parts below, do not convert from another form of equivalent worth; e.g., AW→FW. 1. Compute the AW for Alt A. Based on this measure, should the investment be made? Justify your recommendation.

2. Compute the FW for Alt A. Based on this measure, should the investment be made? Justify your recommendation.

3 Select the preferred alternative using the AW method. Justify your recommendation.

4. Select the preferred alternative using the FW method. Justify your recommendation.

Answer 1

Answer:
Answer 1:		Alternative A	Alternative B
	Investment cost (a)	50,000.00	30,000.00
	Useful life	5 years	5 years
	Annual revenue	15,000.00	10,000.00
	PV of annual revenue (b)	15,000 * PVAF(10%,5)	10,000 * PVAF(10%,5)
		15,000 * 3.7908	10,000 * 3.7908
		56,862.00	37,908.00
	Salvage value	5,000.00	3,000.00
	PV of salvage ©	5,000 * PVIF(10%,5)	3,000 * PVIF(10%,5)
		5,000 * 0.62092	3,000 * 0.62092
		3,104.60	1,862.76
	NPV (b+c-a)	9,966.60	9,770.76
	AW = NPV/PVAF	2,629.15	2,577.49
		9,966.60 / 3.7908	9,770.76 / 3.7908
	Based on AW analysis, Investment in alternative A can be made as it is a positive value.
	this implies that the returns derived from this alternative are more than its costs.
Answer 3:	Also, amongst the two alternatives, Alternative A is only preferred as it has a higher
	annual worth comparatively.
Answer 2:		Alternative A	Alternative B
	Investment cost (a)	50,000.00	30,000.00
	FV of investment cost	50,000 * (1.1^5)	30,000 * (1.1^5)
		80,500.00	48,300.00
	Useful life	5 years	5 years
	Annual revenue	15,000.00	10,000.00
	FV of annual revenue (b)	91,576.50	61,051.00
	(from table below)
	Salvage value (FV only) ©	5,000.00	3,000.00
	FW (b+c-a)	16,076.50	15,751.00
	Calculation of FW of annual revenue:
Year	FV factor @10%	Alternative A	Alternative B
		Annual revenue	Future value	Annual revenue	Future value
1	1.4641	15,000.00	21,961.50	10,000.00	14,641.00
2	1.331	15,000.00	19,965.00	10,000.00	13,310.00
3	1.21	15,000.00	18,150.00	10,000.00	12,100.00
4	1.1	15,000.00	16,500.00	10,000.00	11,000.00
5	1	15,000.00	15,000.00	10,000.00	10,000.00
			91,576.50		61,051.00
	Based on FW analysis, Investment in alternative A can be made as it is a positive value.
	this implies that the returns derived from this alternative are more than its costs.
Answer 4:	Also, amongst the two alternatives, Alternative A is only preferred as it has a higher
	future worth comparatively.
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