Two mutually exclusive alternatives are being considered for pollution control e

Question

Two mutually exclusive alternatives are being considered for pollution control equipment. The economic data is given below:

                                                            A                                 B

Initial cost                               $20,000                       $38,000

Annual expenses                     $5,500                         $5,000

Useful life                               5 years                         9 years

Salvage value at the end         $1,000                         $3,000

Of useful life

The study period is 9 years. If alternative A is selected, a portable system would be leased for the last 4 years at a cost of $10,000 per year including all expenses. If the MARR is 15% per year, which alternative should be selected?

Explanation / Answer

EUAC A B Cash Flow -20000 0.2983 (A/P, 15%, 5) -5966.31 -38000 0.2096 (A/P, 15%, 9) -7963.813 1000 0.1483 (A/F, 15%, 5) 148.3156 3000 0.0596 (A/F, 15%, 9) 178.72205 -5500 1 -5500 -5000 1 -5000 -14194.29 0.2983 (A/P, 15%, 5) -4234.38 (A/P, 15%, 9) -15552.4 -12785.09 PVF 6 10000 0.432327596 4323.276 7 10000 0.37593704 3759.37 8 10000 0.326901774 3269.018 9 10000 0.284262412 2842.624 Present Value 14194.29 Conclusion : Alternative B should be chosen as it has lower EUAC

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