A company has a choice between two mutually exclusive projects, A and B. Project

Question

A company has a choice between two mutually exclusive projects, A and B. Project A lasts for eleven years and Project B lasts for only seven years. The table below contains information about the projects: The company's Minimum Acceptable Rate of Return (MARR), also known as its cost of capital is 12%. Ignore income taxes Calculate the Net Present Value (NPV) of each project assuming that it will NOT be replaced at the end of its useful life. If Project A were replaced with an identical Project A at times 11, 22, 33, 44, 55, and 66, this would be the equivalent of receiving the NPV of Project A calculated in Part 1 above at times 0, 11,22,33,44, 55, 66. What single discount rate would you use to find the Present Value (PV) of these seven payments, and what is the NPV of these seven amounts? If Project B were replaced with an identical Project B at times 7,14,21,28,35,42,49, 56,63 and 70, this would be the equivalent of receiving the NPV of Project B calculated in Part 1 above at times 0, 7,14,21,28,35,42,49, 56,63 and 70. What single discount rate would you use to find the Present Value (PV) of these eleven payments, and what is the NPV of these eleven amounts? Now find the net Equivalent Uniform Benefit (EUB) or net Equivalent Uniform Cost (EUC) for Project A and for Project B over a seventy-seven year period. Using the net EUB (EUC) of Part 4, which project is better? Using the NPV's calculated in Parts 2 and 3, which project is better? Of what use were the NPV's calculated in Part 1?

Explanation / Answer

Calculation of the Net Present Value Discount Rate Initial Cost -60000 1 -60000 Maintenance Cost -6000 5.94 -35640 Benefits 18000 5.94 106920 Salvage Value 600 0.287 172.2 Net Present Value 11452.2 Project B Calculation of the Net Present Value Discount Rate Initial Cost -90000 1 -90000 Maintenance Cost -3000 4.56 -13680 Benefits 27000 4.56 123120 Salvage Value 12000 0.452 5424 Net Present Value 24864

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