Please show your steps i am using this previous exam problem as a study guide fo
ID: 2512279 • Letter: P
Question
Please show your steps i am using this previous exam problem as a study guide for upcoming exam I would like to understand the process. thank you.
5) (10 points) Data for two mutually exclusive alternatives (A and B) are given below: Determine which alternative to select based on a net present worth (NPW) cash flow analysis, and a MARR-7% interest rate Alternative Cash Flows Initial Cost Annual Benefits (beginning at end of year 1) Annual Costs (beginning at end of year 1) Salvage Value (Benefit) Useful Life (years) $10,000 $1200 $250 $500 4 $11,000 $1600 $150 $750Explanation / Answer
Net present worth = Discounted Inflows - Discounted outflows
Net present worth of alternative A:
Discounted value of annual inflows: 1200 x present value annuity factor @7% for 4 years
= 1200 x 3.3872 = $4065
Discounted value of annual outflows: 250 x present value annuity factor @7% for 4 years
= 250 x 3.3872 = $847
Discounted value of salvage value at the end of 4th year = 500 x present value factor @7% for 4 years
= 500 x 0.7629 = $381
Total discounted outflows = 10000 + 847 = $10847
Total discounted inflows = 4065 + 381 =$4446
Net present worth = 4446 - 10847 = - $6401.
Net present worth of alternative B
Discounted value of annual inflows: 1600 x present value annuity factor @7% for 8 years
= 1600 x 5.9713 = $9554
Discounted value of annual outflows: 150 x present value annuity factor @7% for 8 years
= 150 x 5.9713 = $896
Discounted value of salvage value at the end of 4th year = 750 x present value factor @7% for 8 years
= 750 x 0.5820 = $437
Total discounted outflows = 11000 + 896 = $11896
Total discounted inflows = 9554 + 437 =$9991
Net present worth = 9991 - 11896 = - $1905
Since the net present worth of Alternative B is greater than Alternative A it is recommended to opt for Alternative B.