Use annual cash flow analysis with an 8-year analysis period and a 5% interest r

Question

Use annual cash flow analysis with an 8-year analysis period and a 5% interest rate to determine which alternative should be selected if their annual operating costs are the same:

                                                                  Alt. A                  Alt. B

First cost                                                 $5,300                $10,700

Uniform annual benefit                           $2,000                $2,500

End-of-Life Salvage Value                          $0                      $0

Useful life, in years                                       4                        8

Explanation / Answer

Alt. A : Net Present Worth = 2,000(P/A, 5%, 8) - 5,300 - 5,300(P/F, 5%, 4)

= 2,000(6.4632) - 5,300 - 5,300(0.8227) = $3,266

Alt. B : Net Present Worth = 2500(P/A, 5%, 8) -10700

= 2500(6.4632) - 10700 = $5,458

Choose alternative B

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