Tesla is considering developing a new auto pilot system. They have narrowed thei

Question

Tesla is considering developing a new auto pilot system. They have narrowed their choices down to two alternatives. The economic data of the alternatives are listed below 2.1 Description Initial Cost Salvage Value Annual Revenue Annual O&M; Cost Life (Years) MARR System A $540,000.00 $340,000.00 $290,000.00 $190,000.00 5 9% System EB $490,000.00 $280,000.00 $260,000.00 $130,000.00 5 9% a) Calculate the PW for both alternatives. [2 point] b) Calculate the AW for both alternatives. [2 point] Do not use PW to calculate AW. c) Calculate the FW for both alternatives. [2 point] Do not use PW or AW to calculate FW. d) Which alternative should the company choose and why? [1 point + 1 Point]

Explanation / Answer

a) Find the PW as

PW(A) = -540,000 + 340,000(P/F, 9%, 5) + (290,000 - 190,000)(P/A, 9%, 5) = -540,000 + 340,000*0.64993 + 100,000*3.88965 = 69,941.20

PW(B) = -490,000 + 280,000(P/F, 9%, 5) + (260,000 - 130,000)(P/A, 9%, 5) = -490,000 + 280,000*0.64993 + 130,000*3.88965 = 69,941.20 = 197,635.45

b) Find the annual worth of both alternatives

AW(A) = -540,000(A/P, 9%, 5) + 340,000(A/F, 9%, 5) + (290,000 - 190,000) = -540,000*(0.25709) + 340,000*0.16709 + 100,000 = 17,982

AW(B) = -490,000(A/P, 9%, 5) + 280,000(A/F, 9%, 5) + (260,000 - 130,000) = -490,000*(0.25709) + 280,000*0.16709 + 130,000 = 50,811

C) Find the future worth as:

FW(A) = -540,000(F/P, 9%, 5) + 340,000+ (290,000 - 190,000)(F/A, 9%, 5) = -540,000*1.53862 + 340,000 + 100,000*5.98471 = 107,616

FW(B) = -490,000(F/P, 9%, 5) + 280,000 + (260,000 - 130,000)(F/A, 9%, 5) = -490,000*1.53862 + 280,000 + 130,000*5.98471 = 69,941.20 = 304,088

D) We recommend alternative B because its FW, AW and PW all are greater than that of A.

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