The following cost data for a maker of oilrigs is available. Using annual cash f
ID: 2507227 • Letter: T
Question
The following cost data for a maker of oilrigs is available. Using annual cash flow analysis at a MARR of 15%; choose the better of the two alternatives.
Data
Alt. 1
Alt. 2
Initial Cost
$100,000
$200,000
Operating Costs /year
$50,000
$85,000
Annual Benefits
$100,000
$175,000
Salvage Value
$10,000
$20,000
Useful Life
5 Years
6 Years
A.
Alt. 2, EUAW = $39,444
B.
Alt. 2, EUAW = $36,233
C.
Alt. 1, EUAW = $23,405
D.
Alt. 1, EUAW = $21,653
Data
Alt. 1
Alt. 2
Initial Cost
$100,000
$200,000
Operating Costs /year
$50,000
$85,000
Annual Benefits
$100,000
$175,000
Salvage Value
$10,000
$20,000
Useful Life
5 Years
6 Years
Explanation / Answer
Alt 1 :
Cash Flow per year = 100,000 - 50,000 = $ 50,000
NPV = -100,000 + 50,000/1.15 + 50,000/1.15^2 + 50,000/1.15^3 + 50,000/1.15^4 + 50,000/1.15^5 + 10,000/1.15^5
NPV = -100,000 + 50,000*(P/A,15%,5) + 10000*(P/F,15%,5)
NPV = -100,000 + 50,000*3.352 + 10000*0.497
NPV = $ 72,579.52
Alt 2 :
Cash Flow per year = 175,000 - 85,000 = $ 90,000
NPV = -200,000 + 90,000/1.15 + 90,000/1.15^2 + 90,000/1.15^3 + 90,000/1.15^4 + 90,000/1.15^5 + 90,000/1.15^6 + 20000/1.15^6
NPV = -200,000 + 90,000*(P/A,15%,6) + 20000*(P/F,15%,6)
NPV = -200,000 + 90,000*3.7844 + 20000/1.15^6
NPV = $ 149,250
Alt 2 is best choice
EUAW = NPV/Annuity factor = 149250/3.784 = 39,444
A.
Alt. 2, EUAW = $39,444
A.
Alt. 2, EUAW = $39,444
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