Consider this data with MARR = 10%. 1. Why would AW (Annual Worth) be a convenie
ID: 1194548 • Letter: C
Question
Consider this data with MARR = 10%.
1. Why would AW (Annual Worth) be a convenient method here?
2. In order to use the AW approach there is something which must be planned for the future; what is it?
3. What is the AW of each for the given MARR?
4. Based on the result of 3 which is the better investment?
5. Determine if the internal rate of return for System A is higher than 15%.
System A System B Initial Cost 65000 85000 Service Life yrs 5 9 Annual Revenue 19000 190001. Why would AW (Annual Worth) be a convenient method here?
2. In order to use the AW approach there is something which must be planned for the future; what is it?
3. What is the AW of each for the given MARR?
4. Based on the result of 3 which is the better investment?
5. Determine if the internal rate of return for System A is higher than 15%.
Explanation / Answer
1. Annual worth is convinient for budgeting. In this approach we only have to calculate annual worth over one life cycle for each alternative. Here we are given two alternatives with life cycly, annual revenue and initial cost hence it would be easy to calculate annual worth of these options.
2. To use annual worth approach we are required to Convert all cash flows to their end of period equivalent amounts.
AW analysis also requires: – A discount rate before the analysis is started – Estimates of the future cash flows – Estimate of the time period(s) involved
3. AW of system A = 19000 - 65000(A/P,10%,5) = 19000 - 17146.84 = $1853.164
AW of system 2 = 19000 - 85000(A/P,10%,9) = 19000 - 14759.45 = $4240.554
4. From the above annual worths of each system it is clear that System 2 is better investment as it has more annual worth than another one.