(Engineering Economy Course ) Please solve it in a paper for better understandin
ID: 1131411 • Letter: #
Question
(Engineering Economy Course )Please solve it in a paper for better understanding,thanks. Q3. The cash flow for the three types of crane is presented below: Model Purchase Cost Annual Operation Cos $1,000 $800$1,200 Annual Revenue Salvage Value Useful Life 10,000 $15,000 S20,000 $4,000 3.300 $4,700 $25000 5 Years 10 Years 10 Years The alternatives could be replaced with identical cost and benefits. The MARR is 10%. Using Annual Worth (AW) and any other method of analysis, which type of crane, should be selected? (10 marks)
Explanation / Answer
Method 1: Annual worth Method:
For type A crane model:
Net present value = present value of net cash inflows + present value of salvage value– initial investment
Net present value = (4000-1000)*(1-1/1.1^5)/.1 + 2500/1.1^5 - 10000
Net present value = $2924.66
Now, let annual worth = AWa
$2924.66 = AWa*(1-1/1.1^5)/.1 = AWa*3.79
AWa = 2924.66/3.79
AWa= $771.68
For type B crane model:
Net present value = present value of net cash inflows + present value of salvage value– initial investment
Net present value = (3300-800)*(1-1/1.1^10)/.1 + 0 – 15000 = $361.42
Now, let annual worth = AWb
361.42 = AWb*(1-1/1.1^10)/.1 = AWb*6.145
AWb = 361.42/6.145 = $58.82
For type C crane model:
Net present value = present value of net cash inflows + present value of salvage value– initial investment
Net present value = (4700-1200)*(1-1/1.1^10)/.1 + 0 - 20000 = $1505.99
Now, let annual worth = AWc
1505.99= AWc*(1-1/1.1^10)/.1 = AWc*6.145
AWc = 1505.99/6.145 = $245.075
Since highest annual worth is of model A. So model A should be selected.
Method 2: NPV method using LCM
The least common multiple is 10 years.
So,
For type A crane model:
Net present value = present value of net cash inflows + present value of salvage value– initial investment
NPV = (4000-1000)*(1-1/1.1^10)/.1 + 2500/1.1^5 + 2500/1.1^10 – 10000 – 10000/1.1^5
NPV = $4740.65
For type B crane model:
Net present value = present value of net cash inflows + present value of salvage value– initial investment
Net present value = (3300-800)*(1-1/1.1^10)/.1 + 0 – 15000 = $361.42
For type C crane model:
Net present value = present value of net cash inflows + present value of salvage value– initial investment
Net present value = (4700-1200)*(1-1/1.1^10)/.1 + 0 - 20000 = $1505.99
Since the NPV is highest with model A crane among all the models, then it should be selected.
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