3. An engineer analyzed four independent alternatives by the future worth method

Question

3. An engineer analyzed four independent alternatives by the future worth method. She used an interest rate of 10% per year, compounded continuously and got the future worth’s shown below. On the basis of her results, the alternative(s) she should select are: Alternative A B C D E F Future Worth, $ -5,000 2,000 -3,000 -1,000 20 -135

(a) Only A (b) Only B (c) Only E (d) A & C (e) B & E

7. Five mutually exclusive service projects that have infinite lives are under consideration for increasing productivity in a certain manufacturing operation. The initial costs and cash flows of each project are shown below. If the MARR is 15% per year, which project should be selected? PROJECT A B C D E Initial cost, $ -11,000 -12,000 -9,000 -14,000 -15,000 Cash Flow, $/yr -1000 -900 -1400 -700 -300

(a) Project A (b) Project B (c) Project C (d) Project D (e) Project E

Explanation / Answer

3. Option e

Since the future worth is positive for alternative B and E, both of them can be selected among the alternatives.

7. Option e

We need to find the NPV which is maximum at MARR 15% for projects using the formula,

NPV = inital investment+ (cash flow/IRR)

Project Initial cost Cash Flow, $/yr NPV MARR A -11,000 -1000 -17666.7 15% B -12,000 -900 -18000 15% C -9,000 -1400 -18333.3 15% D -14,000 -700 -18666.7 15% E -15,000 -300 -17000 15% Maximum -17000

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