let's discuss two alternatives using present worth analysis. You have two alternatives for computer software your...
let's discuss two alternatives using present worth analysis. You have two alternatives for computer software your company is planning on using for planning and evaluation of component analysis for safety projects. Both have projected lives of 9 years.
Option 1 has an initial purchase price of $41,014 and an annual operating cost of $5500. You have the potential to have an annual benefit each year of $11,000. You have a quoted interest rate of 4%.
Option 2 has an initial purchase price of $33,800 and an annual operating cost of $5900. You have the potential to have an annual benefit of $12,500 annually. You have a quoted interest rate of 5.2%.
Your task this week is to talk through what you would need to do to compare these two alternatives.
Homework Answers
The approach to compare the alternatives is present worth analysis:
Time = 9 years
PW of option 1 = -41014 + (11000-5500)*(1-1/1.04^9)/.04
PW of option 1 = -$119.68 or - $120
====
PW of the option 2 = -33800 + (12500-5900)*(1-1/1.052^9)/.052
PW of the option 2 = $12696.62 or $12697
Now, it can be seen that option 2 has positive present worth, but option 1 has negative present worth. Hence, option 2 should be selected and option 1 should be rejected.
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