Two methods can be used to produce expansion anchors. Method A costs $80,000 ini

Question

Two methods can be used to produce expansion anchors. Method A costs $80,000 initially and will have a $10,000 salvage value after 3 years. The operating cost with this method will be $31,000 in year 1, increasing by $2200 each year. Method B will have a first cost of $111,000, an operating cost of $8000 in year 1, increasing by $6500 each year, and a $41,000 salvage value after its 3-year life. At an interest rate of 11% per year, which method should be used on the basis of a present worth analysis? The present worth for method A is $___ . The present worth for method B is $___ .

Explanation / Answer

Project-A Year PVf @ 11% Cashflows Present values 0 1 -80000 -80000 1 0.900901 -31000 -27927.9 2 0.811622 -33200 -26945.9 3 0.731191 -35400 -25884.2 3 0.731191 10000 7311.914 Present worth of Project-A -153446 Project-B Year PVf @ 11% Cashflows Present values 0 1 -111000 -111000 1 0.900901 -8000 -7207.21 2 0.811622 -14500 -11768.5 3 0.731191 -21000 -15355 3 0.731191 41000 29978.85 Present worth of Project-B -115352

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