Question

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7.For the following table assume a MARR of 6% per year, and a useful life for each alternative of six years. Which equals the study period. The rank order of alternatives from least capital to greatest capital investment is A, C, B. Complete the PW-Incremental Analysis by selecting the preferred alternative. (5ptos) V A Capital Investment A Annual Revenues A Annual Cost A Market Value APW A $15,000 4,000 1,000 6,000 $3,982 A(C-A) A(B-C) $2,000 $3,000 900 460 150 100 -2,200 3,350 $137

Answer 1

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Year	Present Value Factors for 6%
1	0.943
2	0.89
3	0.84
4	0.792
5	0.747
6	0.705
Cummulative	4.917

	A	Change C-A	Change B-C
Change in Capital Investment	15000	2000	3000
Change in Annual Revenues	4000	900	460
Change in Annual Costs	1000	150	100
Change in Market Value	6000	-2200	3350
Change in Present Worth	3982	137

Since, all data is given in incremental form, we can arrive at normal figures for C by adding increments to A's data. Similary we can arrive at normal figures for B by adding increments to C's Normal Data.

	A	C	B
Capital Investment	15000	17000	20000
Annual Revenues	4000	4900	5360
Annual Costs	1000	1150	1250
Market Value	6000	3800	7150
Present Worth	3982	4119

Calculation of Present Worth of B = [Net Annual Cash Flows * Cummulative 6Year,6% Discount Factor] + Market Value(Residual)*6thYear Discount Factor of 6% - Initial Cost
	= [(5360-1250)*4.917] + 7150*0.705 - 20000
	5249.62

Hence, we can fill these tables as follows

	A	C	B
Capital Investment	15000	17000	20000
Annual Revenues	4000	4900	5360
Annual Costs	1000	1150	1250
Market Value	6000	3800	7150
Present Worth	3982	4119	5250

And incremental table will become

	A	Change C-A	Change B-C
Change in Capital Investment	15000	2000	3000
Change in Annual Revenues	4000	900	460
Change in Annual Costs	1000	150	100
Change in Market Value	6000	-2200	3350
Change in Present Worth	3982	137	1131

Based on Present Worth alone, B is the best alternative. However, Profitability Index analysis may be done for proper comparison and wholistic viewpoint.

Please comment in case of any doubt in any step.