Consider the following EOY cash flows for two mutually exclusive alternatives(on

Question

Consider the following EOY cash flows for two mutually exclusive alternatives(one must be chosen):

The MARR is 8% per year.

a)Determine which alternative should be selected if the repeatability assumption applies.Use PW in your analysis.

b)Determine which alternative should be selected if the analysis period is 8 years and the repeatability assumpiton does not apply.Use the AW method.

Alternative A Alternative B Capital Investment 9000 15000 Annual Expenses 2000 2000 Useful Life(years) 3 8 Market value at the end of the useful life 2100 2300

Explanation / Answer

a) PW for A (PWA) = -9,000-2000(P/A,8%,3) + 2100 (P/F,8%,3)

=-9000-2000*(2.5771)+2100*(0.7938) = -9000-5154.2+1666.98= -12487.22

PW for B (PWB) = -15000-2000(P/A,8%,8)+2300(P/F,8%,8)

= -15000-2000(5.7466)+2300(0.5403) = -15000-11493.2+1242.69= -25250.91

PWA>PWB

PWA is to be selected

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