1 Calculate the present worth of each alternative and choose

1. Calculate the present worth of each alternative and choose the best alternative if MARR 1096 and the analysis period is 6 years. Create a cash flow table. Alternative Initial Cost Annual Benefits Annual Costs Salvage Value Useful Life in years $70,000 20,000 $42,500 $20,500 $6,000 $12,000 ?4,000 $4,000 $5,000 A) A, since NPWA NPW 8) B, since NPWs 2 NPWA C) A,since NPWA

Solution

Ans: A, since NPW_A > NPW_B

Explanation:

Alternative A:

Net Annual benefit = 20500 - 6000 = 14500

In 6 years alternative A can be replaced two times.

NPW_A = -42500 + 14500(P/A, 10%, 6) - [(42500 - 12000)(P/F, 10%, 3)] + 12000(P/F, 10%, 6)

           = -42500 + 14500(4.355) - [(42500 - 12000)(0.7513)] + 12000(0.5645)

           = -42500 + 63147.5 - 22914.65 + 6774

           = $4506.85

Alternative B:

Net Annual benefit = 20000 - 4000 = 16000

NPW_B = -70000 + 16000(P/A, 10%, 6) + 5000(P/F, 10%, 6)

           = -70000 + 16000(4.355) + 5000(0.5645)

           = -70000 + 69680 + 2822.5

          = $2502.5

Since NPW of A is greater than NPW of B. So, project A is the best alternative