Project A has a first cost of $3,500, annual operating and maintenance costs of

Question

Project A has a first cost of $3,500, annual operating and maintenance costs of $1,900, annual savings of $2,300, and a salvage value of $1,800 at the end of its 5 year useful life.

Project B has a first cost of $6,000, annual operating and maintenance costs of $1,600, annual savings of $2,500, and a salvage value of $2,000 at the end of its 7 year useful life.

Using a MARR of 5%, answering the following questions:

What is the equivalent uniform annual worth (EUAW) of project A?  

What is the equivalent uniform annual worth (EUAW) of project B?  

Assuming a project will be replaced with an identical project at end of life, which project should be adopted by the company?  

Explanation / Answer

Project A:nEt cash inflow = 2300-1900 = 400

Present value of cash inflow = (PVAF@5%,5 *Net cash inflow)+(PVF@5%,5 *Salvage)

                                           =(4.32948* 400) +    (.78353 * 1800)

                                          = 1731.79+ 1410.35

                                           = 3142.15

NPV = present value -II

          = 3142.15 - 3500 = - 357.85

EUAW = NPV / PVAF@5%,5

              = - 357.85 / 4.32948   

                = $ - 82.65

Project B:Present value = (PVAF@5%,7*Net cash inflow )+(PVF@5%,7 *Salvage)

                   = (5.78637 * 900 ) + (.71068 * 2000)

                   = 5207.73+ 1421.36

                     = 6629.09

NPV = 6629.09 - 6000 = 629.09

EUAW = 629.09 / 5.78637 = $ 108.72

C)Company shall select project B as it has positive NPV and EUAW

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