Problem 05.014 Alternative Comparison-Equal Lives A company that makes food-frie

Question

Problem 05.014 Alternative Comparison-Equal Lives A company that makes food-friendly silicone (for use in cooking and baking pan coatings) is considering the independent projects shown, allof which can be viable for only 10 years. If the company's MARRIS 0% per year, determine which should be selected on te basls of a present worth analysis. The financial values are in $1000 units 800 $-1000 Net Inconme, per Year $150 $1800 1800 57 $7 age Value The present worth of project A is determined to be ST- The present worth of project B is determined to be $ The present worth of project C is determined to be The present worth of project Dis determined to be $ ] Project A bs (Cack to setel Project B ts Clek to select Project CsCick to seed) . Project D is Click toect Pre 1 of 7 Next > 2 345 6 789 0 WERTYUOP SDF GHKL XCBN

Explanation / Answer

Present Worth of Project can be calcualed as follows

PW of Project I=PW of Cash Inflow-PW of Cash Outflow

PW of Cash Inflow=PW of Annual Net Revenue+ PW of Salvage Value

PW of Cash Outflow=First Cost +PW of O&M Annual Cost

PW of any stream=Sum over discounted cash flows in future=sumfrom (t=1 to t=T){CFt/(1+r)^t}

PW of Project A=150((1/1.1)^1+(1/1.1)^2+(1/1.1)^3+...+(1/1.1)^10)+6*(1/1.1)^10-1000

FOr our convinence we should calculate ((1/1.1)^1+(1/1.1)^2+(1/1.1)^3+...+(1/1.1)^10) =6.1445 and use for all projects

PW for Project A=150*6.1445+2.3131-1000=-$76012

PW for Project B=350*6.1445+7*2.313-2400=-$233,234

PW for Project C=1800*6.1445+7*2.313-4800=-$6,276,291

PW for Project D=1800*6.1445+7*2.313-5800=-$5,276,291

Hence Project C to be choen

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