evaluating a single alternative using annual cash flow analysis, the alternative

Question

evaluating a single alternative using annual cash flow analysis, the alternative is recommended for investment if (EAB - EAC) is positive or zero at the MARR. Otherwise, reject the investment.

An asset has an initial cost of $100,000 and an estimated salvage value of $40,000 after its 6- year service life. Estimated O&M costs are $50,000 in year one, increasing by $6,000 per year thereafter. The asset is expected to generate an annual benefit of $110,000. Is this a desirable investment if the MARR is 20%?

Explanation / Answer

Solution:

Since NPV is positive so the investment is acceptable.

Year Intial Cost O& M Benefits SV Total 0 -1,00,000 - - - -1,00,000 1 -50,000 1,10,000 - 60,000 2 -56,000 1,10,000 - 54,000 3 -62,000 1,10,000 - 48,000 4 -68,000 1,10,000 - 42,000 5 -74,000 1,10,000 - 36,000 6 -80,000 1,10,000 40,000 70,000 Net Present Value @20% 73,442.85

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