Suppose that an asset costing $75,000 will result in an annual saving of $30,000

Question

Suppose that an asset costing $75,000 will result in an annual saving of $30,000 for as long as the asset is serviceable. The probabilities that the asset will remain serviceable for a certain number of years are as follows:

No. of Yrs. Asset Functions (N)

Prob. Asset is Productive Exactly N Yrs [Prob(N)]

1

0.1

2

0.2

3

0.2

4

0.3

5

0.1

6

0.1

What is the expected net present worth (NPW) of the venture if the MARR = 16%?

Suppose that an asset costing $75,000 will result in an annual saving of $30,000 for as long as the asset is serviceable. The probabilities that the asset will remain serviceable for a certain number of years are as follows:

No. of Yrs. Asset Functions (N)

Prob. Asset is Productive Exactly N Yrs [Prob(N)]

1

0.1

2

0.2

3

0.2

4

0.3

5

0.1

6

0.1

What is the expected net present worth (NPW) of the venture if the MARR = 16%?

Explanation / Answer

PV of cash flow = cashflow/(1+i)^n

where i = 16% and n is the number of period

Year probability asset is productive Annual saving Payoff PV 1 0.1          30,000         3,000              2,609 2 0.2          30,000         6,000              4,537 3 0.2          30,000         6,000              3,945 4 0.3          30,000         9,000              5,146 5 0.1          30,000         3,000              1,492 6 0.1          30,000         3,000              1,297 NPV (10,975.05)

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