The City of Greenhills is considering an aquaduct with the following two options
ID: 2783833 • Letter: T
Question
The City of Greenhills is considering an aquaduct with the following two options:
Other annual maintenance costs for both the options are the same and hence can be ignored in conducting the analysis. The price for Option P is estimated to be constant over the foreseeable future. Which would you recommend based on EUAW if the city has to pick one option? Assume the benefits for the second copy of Option P revert back in the first year to the number provided.
Option P
Option Q
Option P and Q are both equally good.
None of the ones are good; both need to be rejected.
Option P Option Q Initial Cost $256,000 $595,000 Life 5 10 Salvage 10% 10% First year benefits $21,000 $35,000 Increase in benefits per year $3,000 $4,000 Rate 5% 5% p y c yExplanation / Answer
CALCULATION OF PRESENT VALUE OF THE PROJECT P Year Cash Flow PVF @ 5% Present Value 0 $ -2,56,000.00 1 $ -2,56,000.00 1 $ 21,000.00 0.9524 $ 20,000.00 2 $ 24,000.00 0.9070 $ 21,768.71 3 $ 27,000.00 0.8638 $ 23,323.62 4 $ 30,000.00 0.8227 $ 24,681.07 5 $ 33,000.00 0.7835 $ 25,856.36 Salvage 5th yr $ 25,600 0.7835 $ 20,058.27 $ -1,20,311.97 Answer = Present Value = $ -1,20,311.97 CALCULATION OF PRESENT VALUE OF THE PROJECT Q Year Cash Flow PVF @ 5% Present Value 0 $ -5,95,000.00 1 $ -5,95,000.00 1 $ 35,000.00 0.9524 $ 33,333.33 2 $ 39,000.00 0.9070 $ 35,374.15 3 $ 43,000.00 0.8638 $ 37,145.02 4 $ 47,000.00 0.8227 $ 38,667.02 5 $ 51,000.00 0.7835 $ 39,959.83 6 $ 55,000.00 0.7462 $ 41,041.85 7 $ 59,000.00 0.7107 $ 41,930.20 8 $ 63,000.00 0.6768 $ 42,640.88 9 $ 67,000.00 0.6446 $ 43,188.80 10 $ 71,000.00 0.6139 $ 43,587.84 Salvage 5th yr $ 59,500 0.6139 $ 36,527.84 $ -1,61,603.25 Answer = Present Value = $ -1,61,603.25 Both project have the negative cash flow so the both project will be rejectes Answer = Option 4 = None of the ones are good; both need to be rejected