(35 points: manually solve using both NPW, aka PW and AW methods) Three mutually

Question

(35 points: manually solve using both NPW, aka PW and AW methods) Three mutually exclusive investment alternatives for implementing an office automation plan in an engineering design firm are being considered. Each alternative meets the same service (support) requirements, but they differ in capital investment and annual cost savings. The study period is 10 years and useful life of all three alternatives is also 10 years. Market values of all alternatives are assumed to be zero at the end of their useful lives. If the firm's MARR is 10% per year, which alternative must be selected in view of following estimates? 1. Alternative Capital Investment S390,000 S660,000 S167,000 S133,500

Explanation / Answer

Find the PW and AW of all alternatives

Alternative A

PW = -390,000 + 69000(P/A, 10%, 10) = -390,000 + 69000*6.14457 = 33,975

AW = PW (A/P, 10%, 10) = 33,975*0.16275 = 5,529.

Alternative B

PW = -920,000 + 167,000(P/A, 10%, 10) = -920,000 + 167000*6.14457 = 106,143

AW = PW (A/P, 10%, 10) = 106,143*0.16275 = 17,274

Alternative C

PW = -660,000 + 133,500(P/A, 10%, 10) = -660,000 + 133,500*6.14457 = 160,300

AW = PW (A/P, 10%, 10) = 160,300*0.16275 = 26,088

Note that PW of C > PW of B > PW of A

Also AW of C > AW of B > AW of A

Hence we must select alternative C.

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