3. Financial da d at the end of the table below. Assume that alternatives are re

Question

3. Financial da d at the end of the table below. Assume that alternatives are replace their useful lives. MARR = 8% Data Initial Cost $5,000 $1OO0$2,50o Uniform Annual | $650 | Benefits 350 Salvage Value $5,00o $1,760 $2,000 Useful Life in 20 Years 5 10 a. Find the EUAC of alternative P b. Find the EUAB of alternative R 4. Determine the internal rate of return for an equipment that costs $150,000 and would provide positive cash flows of $60,000, $ 50,000, $ 40,000, and 40,000 at the end of each year for the next four years

Explanation / Answer

Q3

Alternative P

PW(8%) = -5000 + 650(P/A, 8%, 20) + 5000(P/F, 8%, 20) =  -5000 + 650*9.81815 + 5000*0.21455 = 2454.55

EUAC (its benefit here) = 2454.55(A/P, 8%, 20) = 0.10185*2454.55 = 250.

Alternative R

Repeated twice

PW(8%) = -2500 + 350(P/A, 8%, 20) + (2000 - 2500)(P/F, 8%, 10) + 2000(P/F, 8%, 20)

= -2500 + 350*9.81815 + (2000 - 2500)*0.46319 + 2000*0.21455 = 1134

EUAB = 1134(A/P, 8%, 20) = 0.10185*1134 = 115.50

Q4

IRR for the project is

PW = 0

-150000 + 60000(P/F, i%, 1) + 50000(P/F, i%, 2) + 40000(P/F, i%, 3) + 40000(P/F, i%, 4) = 0

Trial and error gives a range of 8% and 12%. Use interpolation

For i = 8%, PW = 9577 and for i = 12%, PW = -2677

IRR = 8% + (12% - 8%) x (9577/(9577- (-2677))

= 11.12%.

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