Question

A telecommunications firm is considering a product expansion of a popular cell phone. Two alternatives for the cell phone expansion are summarized below. The company uses an MARR of 9% per year for decisions of this type, and repeatability may be assumed. L Initial Cost (S) Annual Benefit ($) Salvage Value (S) Useful Life (yrs) Expansion A 148,650.000 1,090,000 10.725,000 Expansion B 63.750,000 2,860,000 12,380,000 1. Which Expansion Option should be taken? Use the Equivalent Uniform Annual Worth Method. You must tell me the EUAC for each option and why you picked it.

Answer 1

AEC = -P(A/P,i%,n)+A_m+F(A/F,i%,n)
where, P is the initial cost, A_m is the annual benefit and F is the salvage value

thus the required AEC for Expansion A is
                                    = -148650000(A/P,9%,3)+1090000 +10725000(A/F,9%,3)
= -148650000(.3951)+1090000 +10725000(.3051)
                                    = $-54369417.5

Hence, the  annual equivalent cost for Expansion A is $-54369417.5

Similarly, the required AEC for Expansion B is
                                    = -63750000(A/P,9%,6)+2860000 +12380000(A/F,9%,6)
                                    = -63750000(.2229)+2860000 +12380000(.1329)
                                    = $-9704573

Hence, the  annual equivalent cost for Expansion B is $-9704573

Hence, Expansion B will be selected as its Equivalence Uniform annual cost is less in comparison to Expansion A