Consider the following two mutually exclusive service projects with project live
ID: 1179966 • Letter: C
Question
Consider the following two mutually exclusive service projects with project lives of three years and two years, respectively. (The mutually exclusive service projects will have identical revenues for each year of service.) The interest rate is know to be 12%.
If the required service period is six years and both projects can be repeated with the given costs and better service projects are unavailable in the future, which project is better and why? Choose from the following options:
(a) Select Project B because it will save you $344 in present worth over the required service period.
(b) Select Project A because it will cost $1,818 in NPW each cycle, with only one replacement, whereas Project B will cost $1,138 in NPW each cycle with two replacements.
(c) Select Project B because its NPW exceeds that of Project A by $680.
(d) None of the above.
Please show work.
Consider the following two mutually exclusive service projects with project lives of three years and two years, respectively. (The mutually exclusive service projects will have identical revenues for each year of service.) The interest rate is know to be 12%.Explanation / Answer
Project A will be replaced aftre 3 years
Net present worth of Project A for 6 years = -1000 -400/1.12 + -400/1.12^2 -200/1.12^3 -1000/1.12^3 -400/1.12^4 + -400/1.12^5-200/1.12^6 =-$3112.66
Project B will be replaced aftre 2 years and 4 years
Net present worth of Project B for 6 years =-800 -200/1.12 -200/1.12^2-800/1.12^2 -200/1.12^3 -200/1.12^4 -800/1.12^4 -200/1.12^5 -200/1.12^6
=-$2768.45
Project B has lower net present cost
Difference = -$3112.66-(-$2768.45) =-$344
(a) Select Project B because it will save you $344 in present worth over the required service period.