Two plans are under consideration to provide certain facilavies for a public uni

Question

Two plans are under consideration to provide certain facilavies for a public uniling ach oun is designed to provide enough capacity during the next 18 years to take care o growth of load during that period. Regardless of the plan chosem mefifts syp 20 Marks facilities will be retired at the end of 18 years and replaced by a new p the espected Plan I requires an initial investment of $50,000. This will be followed by an i $25,000 at the end of 9 years. During the first 9 years, annual during the final 9 years, they will be $18,000. There will be a $10,000 salvage value at end of the 18th year. disbursements will Plan II requires an initial investment of $30,000. This will be followed by an investment of $30,000 fi rst 6 years annual disbursements will be $8,000, during the second 6 years they will be S16,000: during the final 6 years they will be $25,000. There will be no salvage value at the end of the 18h year. at the end of 6 years and an investment of $20,000 at the end of 12 years. During the Using an i of 990, compare the prese which plan will you recommend? nt worth of the net disbursements for the two plans and

Explanation / Answer

Plan 2 will be recommended because Present worth of plan 2 is more than Plan 1. Using the following table.

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Plan 1 Dicount Rate = 9% Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Initial investment -50,000 -25000 11000 11000 11000 11000 11000 11000 11000 11000 11000 18000 18000 18000 18000 18000 18000 18000 18000 18000 Salvage Value 10000 Free Cash Flow -50,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 -14,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 28,000 Present Worth using NPV function Present Worth 56,243.77 NPV(9%, All Cash flows) Plan 1 Dicount Rate = 9% Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Initial investment -30,000 -30000 -20000 8000 8000 8000 8000 8000 8000 16000 16000 16000 16000 16000 16000 25000 25000 25000 25000 25000 25000 Salvage Value 0 Free Cash Flow -30,000 8,000 8,000 8,000 8,000 8,000 -22,000 16,000 16,000 16,000 16,000 16,000 -4,000 25,000 25,000 25,000 25,000 25,000 25,000 Present Worth using NPV function Present Worth 63,558.04 NPV(9%, All Cash flows)

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