Consider the two mutually exclusive projects in the table below. Salvage values
ID: 2739690 • Letter: C
Question
Consider the two mutually exclusive projects in the table below. Salvage values represent the net proceeds (after tax) from disposal of the assets if they are sold at the end of each year. Both projects B1 and B2 will be available (or can be repeated) with the same costs and salvage values for an indefinite period. Click the icon to view the additional data about the mutually exclusive projects. Click the icon to view the interest factors for discrete compounding when MARR = 15% per year. Assuming an infinite planning horizon, which project is a better choice at MARR = 15%? Use 15 years as the common analysis period. The present worth for project B1 is $ thousand. (Round to one decimal place.) The present worth for project B2 is $ thousand. (Round to one decimal place.) Which project is a better choice? Choose the correct answer below. Project B1 Project B2 With a 10-year planning horizon, which project is a better choice at MARR = 15%? The present worth for project B1 is $ thousand. (Round to one decimal place.) The present worth for project B2 is $ thousand. (Round to one decimal place.) Which project is a better choice? Choose the correct answer below. Project B1 Project B2 More Info More InfoExplanation / Answer
(a)
Computation of which project is better:
Project B1:
B1
Year
Cash flow
Discounting factor
@15%
Discounting
cash flows
0
-16000
1
$ (16,000.00)
1
1900
0.86957
$ 1,652.18
2
1900
0.75614
$ 1,436.67
3
1900
0.65752
$ 1,249.29
4
1900
0.57175
$ 1,086.33
5
1900
0.49718
$ 944.64
6
1900
0.43233
$ 821.43
7
1900
0.37594
$ 714.29
8
1900
0.3269
$ 621.11
9
1900
0.28426
$ 540.09
10
1900
0.24718
$ 469.64
11
1900
0.21494
$ 408.39
12
1900
0.18691
$ 355.13
13
1900
0.16253
$ 308.81
14
1900
0.14133
$ 268.53
15
1900
0.12289
$ 233.49
15
3000
Salvage value
0.12289
$ 368.67
NPV
$ (4,521.33)
The present worth of project B1 is ($4,521.33).
Note:
Assume cash flow and salvage value given in the question up to 5 years. But we calculate up to 15 years, 6th year onwards same values of 5th year are taken.
Project B2:
B2
Year
Cash flow
Discounting factor
@15%
Discounting
cash flows
0
-29000
1
$ (29,000.00)
1
1500
0.86957
$ 1,304.36
2
1500
0.75614
$ 1,134.21
3
1500
0.65752
$ 986.28
4
1500
0.57175
$ 857.63
5
1500
0.49718
$ 745.77
6
1500
0.43233
$ 648.50
7
1500
0.37594
$ 563.91
8
1500
0.3269
$ 490.35
9
1500
0.28426
$ 426.39
10
1500
0.24718
$ 370.77
11
1500
0.21494
$ 322.41
12
1500
0.18691
$ 280.37
13
1500
0.16253
$ 243.80
14
1500
0.14133
$ 212.00
15
1500
0.12289
$ 184.34
NPV
$ (20,228.95)
The present worth of project B2 is ($20,228.95).
Note: Assume cash flow and salvage value given in the question up to 5 years. But we calculate up to 15 years, 6th year onwards same values of 5th year are taken.
Decision:
Project B1 have low negative value compare to project B2. Project B1 would be selected.
(b)
Computation of which project is better:
Project B1:
B1
Year
Cash flow
Discounting factor
@15%
Discounting
cash flows
0
-16000
1
$ (16,000.00)
1
1900
0.86957
$ 1,652.18
2
1900
0.75614
$ 1,436.67
3
1900
0.65752
$ 1,249.29
4
1900
0.57175
$ 1,086.33
5
1900
0.49718
$ 944.64
6
1900
0.43233
$ 821.43
7
1900
0.37594
$ 714.29
8
1900
0.3269
$ 621.11
9
1900
0.28426
$ 540.09
10
1900
0.24718
$ 469.64
10
3000
0.24718
$ 741.54
NPV
$ (5,722.80)
The present worth of project B1 is ($5,722.80).
Note:
Assume cash flow and salvage value given in the question up to 5 years. But we calculate up to 10 years, 6th year onwards same values of 5th year are taken.
Project B2:
B2
Year
Cash flow
Discounting factor
@15%
Discounting
cash flows
0
-29000
1
$ (29,000.00)
1
1500
0.86957
$ 1,304.36
2
1500
0.75614
$ 1,134.21
3
1500
0.65752
$ 986.28
4
1500
0.57175
$ 857.63
5
1500
0.49718
$ 745.77
6
1500
0.43233
$ 648.50
7
1500
0.37594
$ 563.91
8
1500
0.3269
$ 490.35
9
1500
0.28426
$ 426.39
10
1500
0.24718
$ 370.77
NPV
$ (21,471.85)
The present worth of project B2 is ($21,471.85).
Note: Assume cash flow and salvage value given in the question up to 5 years. But we calculate up to 10 years, 6th year onwards same values of 5th year are taken.
Decision:
Project B1 have low negative value compare to project B2. Project B1 would be selected.
B1
Year
Cash flow
Discounting factor
@15%
Discounting
cash flows
0
-16000
1
$ (16,000.00)
1
1900
0.86957
$ 1,652.18
2
1900
0.75614
$ 1,436.67
3
1900
0.65752
$ 1,249.29
4
1900
0.57175
$ 1,086.33
5
1900
0.49718
$ 944.64
6
1900
0.43233
$ 821.43
7
1900
0.37594
$ 714.29
8
1900
0.3269
$ 621.11
9
1900
0.28426
$ 540.09
10
1900
0.24718
$ 469.64
11
1900
0.21494
$ 408.39
12
1900
0.18691
$ 355.13
13
1900
0.16253
$ 308.81
14
1900
0.14133
$ 268.53
15
1900
0.12289
$ 233.49
15
3000
Salvage value
0.12289
$ 368.67
NPV
$ (4,521.33)