2) Consider the following after-tax cash flows: MARR is 10 % (compounded annuall

Question

2) Consider the following after-tax cash flows: MARR is 10 % (compounded annually) (a) Compute the future worths of the projects at the end of period 7. (b) Assume that the required service period is seven years and that the company is considering a comparable equipment that has an annual lease expense of S 10,000 for period seven (to be paid at the end of year 7) , if project B is chosen. This will result in an income of $ 12,500 at the end of period 7. Which project is the better choice, using present worth as the criterion?

Explanation / Answer

A B FV @ 10% Future Value A Future Value B 0 -$2,500 -$5,000 0 -$2,500 -$5,000 1 $2,000 $2,500 1.1 $2,200 $2,750 2 $2,000 $2,500 1.21 $2,420 $3,025 3 $2,000 $2,500 1.331 $2,662 $3,328 4 $2,000 $2,500 1.4641 $2,928 $3,660 5 $2,000 $2,500 1.61051 $3,221 $4,026 6 $2,000 $2,500 1.771561 $3,543 $4,429 7 $2,000 $0 1.948717 $3,897 $0 Total $18,372 $16,218 b. A B PV @ 10% Present Value A Present Value B 0 -$2,500 -$5,000 0 -$2,500 -$5,000 1 $2,000 $2,500 0.909091 $1,818 $2,273 2 $2,000 $2,500 0.826446 $1,653 $2,066 3 $2,000 $2,500 0.751315 $1,503 $1,878 4 $2,000 $2,500 0.683013 $1,366 $1,708 5 $2,000 $2,500 0.620921 $1,242 $1,552 6 $2,000 $2,500 0.564474 $1,129 $1,411 7 -$10,000 -$10,000 0.513158 -$5,132 -$5,132 7 $14,500 $12,500 0.513158 $7,441 $6,414 Total $8,520 $7,171 Project A would be selected

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