Consider the following EOY cash flows for two mutually exclusive alternatives. (

Question

Consider the following EOY cash flows for two mutually exclusive alternatives. (one must be chosen)

Annual expenses (TL)

The MARR is 8% per year.

a) Determine which alternative should be selected if the repeatability assumption applies. Use PW in your analysis.

PW (A) =?

PW (B) =?

Which one is preferred?

b) Determine which alternative should be selected if the analysis period is 6 years and the repeatability assumption does not apply. Use the AW method.

AW (A) =?

AW (B) =?

Which one is preferred?

Alternative A Alternative B Capital investment (TL) 4000 12000

Annual expenses (TL)

2800 2300 Useful life (years) 3 6 Market value at the end of 2900 2900 Useful life (TL)

Explanation / Answer

Alternative A:

NPW = -2,800(P/A, 8%, 3) - 4,000 + 2,900(P/F, 8%, 3)

= -2,800(2.57710) - 4,000 + 2,900(0.79383)

= -$8,913.77

Now the same NPV is obtained after year 3 for repeating use of same model

So value of -$8,913.77 at year 3 discounted to current time is $8913.77 x 0.79383 = $7,076.04 and total becomes ($8,913.77+$7,076.04) = -$15,989.81 for 6 years horizon.

Alternative B:

NPW = -2,300(P/A, 8%, 6) - 12,000 + 2,900(P/F, 8%, 6)

= -2,300(4.62288) - 12,000 + 2,900(0.63017)

= -$20,805.10

Alternative A is preferred since it has lowest negative NPV.

Alternative A:

AW = -4,000(A/P, 8%, 3) - 2,800 + 2,900(A/F, 8%, 3)

= -4,000(0.38803) - 2,800 + 2,900(0.30803)

= -$3,458.83

Alternative B:

AW = -12,000(A/P, 8%, 6) - 2,300 + 2,900(A/F, 8%, 6)

= -12,000(0.21632) - 2,300 + 2,900(0.13632)

= -$4,500.51

Alternative A is preferred since it has lowest AW.

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