Question

Use the following information for questions 13, 14, and 15. You must decide between two potential alternatives using Present Worth Analysis. NOTE: The first alternative (which has an expected life of ten (10) years) has already been calculated for you. It was found to have NPW - $8,241 based on an MARR -18%. Initial Cost Benefits Alternative #2 $200,000 $95,000 in years I and 2 $70,000 in years 3 and 4. $50,000 in year 5 $20,000 per year $35,000 O&M Costs Salvage Life (in years) 13. The NPW for Alterative 12 that is necessary to make a decision is closest to a) $2,979 b) S2,073 c)-S3,173 d) S115,000 c)-S2,347 f) S4.144 g) S166.265

Answer 1

Correct Answer:

A

Working note:

On the basis of principle of least common multiple (LCM), the project will be repeated to make the life of alternative 2 to be equal to the life of alternative 1. it will make the total life of alternative 2 to be 10 years.

So, time = 10 years

R = 8%

NPW = PW of the benefits + PW of the salvage value - PW of the initial cost - PW of the O&M cost

NPW = (95000/1.18 + 95000/1.18^2 + 70000/1.18^3 + 70000/1.18^4 + 50000/1.18^5 + 95000/1.18^6 + 95000/1.18^7 + 70000/1.18^8 + 70000/1.18^9 + 50000/1.18^10) + (35000/1.18^5 + 35000/1.18^10) - (200000 - 200000/1.18^5) - 20000*(1-1/1.18^10)/.18

NPW = 2955.04 or 2955 ( it is closest to alternative A)