Choose between the following two projects. Make your decision based on present w
ID: 1099399 • Letter: C
Question
Choose between the following two projects. Make your decision based on present worth. Make any reasonable assumptions concerning the diffrence in Planning Horizons but clearly state what you assuming and annalyze in accordance with the rule of common planning horizons. MARR is 6%.
a) An initial investment is required of 150,000 dollars. A salvage value of 40,000 will be obtained at the end of five years. At the end of the first year a return of 30,000 dollars is obtained. Each year the return increases by 20,000.
b) An intial investment is required of 100,000 dollars. A salvage value of 15,000 will be obtained at the end of 7 years. At the end of the first year a return of 20,000 dollars is obtained. Each year the return increases by 10,000.
Explanation / Answer
a) The common planning horizon is 7*5 = 35 years
Following table caslculates the present worth of 1st project
Present worth =$567,737.73
b) Present worth = $457,410.04
1st project should be selected because it has higher present worth
Year Negative Cash flows Positive cash flows Salvage value Free cash flow NPV 0 -150000 -150000 $567,737.73 1 30000 30000 2 50000 50000 3 70000 70000 4 90000 90000 5 -150000 110000 40000 0 6 30000 30000 7 50000 50000 8 70000 70000 9 90000 90000 10 -150000 110000 40000 0 11 30000 30000 12 50000 50000 13 70000 70000 14 90000 90000 15 -150000 110000 40000 0 16 30000 30000 17 50000 50000 18 70000 70000 19 90000 90000 20 -150000 110000 40000 0 21 30000 30000 22 50000 50000 23 70000 70000 24 90000 90000 25 -150000 110000 40000 0 26 30000 30000 27 50000 50000 28 70000 70000 29 90000 90000 30 -150000 110000 40000 0 31 30000 30000 32 50000 50000 33 70000 70000 34 90000 90000 35 110000 40000 150000