When evaluating a single alternative using annual cash flow analysis, the altern

Question

When evaluating a single alternative using annual cash flow analysis, the alternative is recommended for investment if (EAB - EAC) is positive or zero at the MARR. Otherwise, reject the investment. An asset has an initial cost of $100,000 and an estimated salvage value of $40,000 alter its 6-ycar service life. Estimated O&M; costs are $50,000 in year one, increasing by S6,000 per year thereafter. The asset is expected to generate an annual benefit of $110,000. Is this a desirable investment if the MARR is 20%?

Explanation / Answer

                     Cash outflow                      Cash inflow Year Initial investment O&M cost Annual Benefit Salvage Value Net cash Flow 0 -100000 -100000 1 -50000 110000 60000 2 -56000 110000 54000 3 -62000 110000 48000 4 -68000 110000 42000 5 -74000 110000 36000 6 -80000 110000 40000 70000 MARR 20% EAC = ( Asset price * discount rate) / (1-(1+discount rate)-n)          = ( 100000 * 0.20)/ ( 1 - ( 1+0.20)-6)          = 20000 / ( 1 - 0.3349)          = 20000 / 0.6651 30070.67          = 30070.67 EAB = cf1/( 1+ r)1+cf2/(1+r)2+cf3/(1+r)3 + cf4/(1+r)4 + cf5 /(1+r)5+cf6/(1+r)6           = 60000 /(1+0.20)1 + 54000/(1+0.20)2 + 48000 /(1+0.20)3 + 42000 /(1+0.20)4 + 36000/(1+0.20)5+70000/(1+0.20)6           = 60000 /1.20 + 54000 /1.44 + 48000 /1.728 + 42000/2.0736 + 36000 /2.4883 + 70000/2.986           = 50000 + 37500 + 27777.78 + 20254.63 + 14467.71 + 23442.73            = 173442.85 EAB - EAC = 173442.85- 30070.67 =    143372.18 Since EAB -EAC is positive , the project should be accepted

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