Question

solve with (cash flow diagram)

A remotely located air sampling station can be powered by solar cells or by running an electric line to the site and using conventional power. Solar cells will cost $12.600 to install and will have a useful life of 4 years with no salvage value. Annual costs for inspection, cleaning, etc. are expected to be $1400. A new power line will cost $11,000 to install, with power costs expected to be $800 per year. Since the air sampling project will end in 4 years, the salvage value of the line is considered to be zero. At an interest rate of 10% per year. which alternative should be selected on the basis of a future worth analysis?

(Don't not use excel)

Answer 1

Answer:-

When the life of alternatives evaluated are not same then we have to use either LCM of Lives or we have to use a study period which will equalize the study period.

Please see the below table of alternatives available,

Alternatives	Solar Panel	Power Line
First cost(C)	-12600	-11000
Annual Expense (A)	-1400	-800
Life (n)	4	4
Interest Rate(i)	10%	10%

Future Value of Solar Panel (FW) = -12,600(F/P,10%,4) -1,400(F / A,10%,4) = -12,600*1.464 - 1400*4.464

= -$24,945

Future Value of Power Line = -11000(F / P,10%,4) -800(F /A,10%,4) = -11,000*1.464 - 800*4.464

= -$19,818

Alternatives Power line has better future worth that alternatives Sonal Panel. So alternative Power line should be selected.