The accounting department is involved in a little wager. The accountants believe
ID: 2461325 • Letter: T
Question
The accounting department is involved in a little wager. The accountants believe that an engineer cannot correclty determine which alternative should be chosen using equivalent uniform annual cash flow analysis. As a means of proving this statement, the accountants have provided you with the following data: The accounting department has chose Alternative B. Use the best method to select the best alternative and use cash flow of each alternative using a MARR of 12% State whether or not you agree with the accounting department.Explanation / Answer
Solution:
Calculation of Annual Cash Flow from each alternative
Annual Cash Flow = Annual Benefit – M&O Grad. – M&O Cost =
Annual Cash Flow Alt-A = $67,000 - $2,800 - $21,200 = $43,000
Annual Cash Flow Alt-B = $73,000 - $3,000 - $29,000 = $41,000
Annual Cash Flow Alt-C = $46,000 - $2,000 - $15,000 = $29,000
Calculation of Net Present Value of each alternative
Year
CASH FLOW
Alt-A
Alt-B
Alt-C
Annual Cash Flow Year 1 - 7
$43,000
Annual Cash Flow Year 1 - 11
$41,000
Annual Cash Flow Year 1 - 9
$29,000
PVA @ 12%
4.564
5.938
5.328
Present Value of Cash Flow (Annual Cash Flow x PVA)
$196,252
$243,458
$154,512
Less: Present Value of Cash Outflow at Year 0
($123,000)
($135,000)
($112,000)
Net Present Value
$73,252
$108,458
$42,512
Best Alternative is Alternative B, since the Net Present Value under Alternative B is higher than other alternatives.
Accounting Department decision is correct.
Year
CASH FLOW
Alt-A
Alt-B
Alt-C
Annual Cash Flow Year 1 - 7
$43,000
Annual Cash Flow Year 1 - 11
$41,000
Annual Cash Flow Year 1 - 9
$29,000
PVA @ 12%
4.564
5.938
5.328
Present Value of Cash Flow (Annual Cash Flow x PVA)
$196,252
$243,458
$154,512
Less: Present Value of Cash Outflow at Year 0
($123,000)
($135,000)
($112,000)
Net Present Value
$73,252
$108,458
$42,512
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