Consider the two mutually exclusive projects in the table below. Salvage values

Question

Consider the two mutually exclusive projects in the table below. Salvage values represent the net proceeds (after tax) from disposal of the assets if they are sold at the end of each year. Both projects B1 and B2 will be available (or can be repeated) with the same costs and salvage values for an indefinite period EE Click the icon to view the additional data about the mutually exclusive projects Click the icon to view the interest factors for discrete compounding when MARR-11% per year (a) Assuming an infinite planning horizon, which project is a better choice at MARR= 11%? Use 15 years as the common analysis period The present worth for project B1 is S? thousand. (Round to one decimal place.) More Info B1 Salvage Value B2 Cash Flow Cash Flow Salvage Value 0 -$27,000 13,500 12,000 9,000 7,000 6,000 - $14,000 - 2,300 -2,300 - 2,300 - 2,900 -2,900 - 2,900 -2,900 - 2,900 7,000 4,500 2,500 4

Explanation / Answer

Present worth of Project B1 is ($66,458)

Present worth of Project B2 is ($40,891)

Hence Project B2 is a better choice at MARR of 11 %

Explanation:

Project B1

Project B2

Project B1

Project B2

Year

Cash Flow (CB1)

Cash Flow (CB2)

PV Factor @ 11 % (F)

PV (= F x CB1)

PV (= F x CB2)

0

($27,000)

($14,000)

1

($27,000)

($14,000)

1

($2,900)

($2,300)

0.900900901

($2,613)

($2,072)

2

($2,900)

($2,300)

0.811622433

($2,354)

($1,867)

3

($2,900)

($2,300)

0.731191381

($2,120)

($1,682)

4

($2,900)

($2,300)

0.658730974

($1,910)

($1,515)

5

($23,900)

($13,800)

0.593451328

($14,183)

($8,190)

6

($2,900)

($2,300)

0.534640836

($1,550)

($1,230)

7

($2,900)

($2,300)

0.481658411

($1,397)

($1,108)

8

($2,900)

($2,300)

0.433926496

($1,258)

($998)

9

($2,900)

($2,300)

0.390924771

($1,134)

($899)

10

($23,900)

($13,800)

0.352184479

($8,417)

($4,860)

11

($2,900)

($2,300)

0.317283314

($920)

($730)

12

($2,900)

($2,300)

0.285840824

($829)

($657)

13

($2,900)

($2,300)

0.257514256

($747)

($592)

14

($2,900)

($2,300)

0.231994825

($673)

($534)

15

$3,100

$200

0.209004347

$648

$42

NPW

($66,458)

($40,891)

Project B1:

Cash flow for year 5 = Annual expenses + Salvage value + Initial investment

                          = -$ 2,900 + $ 6,000 - $ 27,000 = $ 23,900

Cash flow for year 15 = -$ 2,900 + $ 6,000 = $ 3,100

Project B2:

Cash flow for year 5 = Annual expenses + Salvage value + Initial investment

                       = -$ 2,300 + $ 2,500 - $ 14,000 = $ 13,800

Cash flow for year 15 = -$ 2,300 + $ 2,500 = $ 200

Project B1

Project B2

Project B1

Project B2

Year

Cash Flow (CB1)

Cash Flow (CB2)

PV Factor @ 11 % (F)

PV (= F x CB1)

PV (= F x CB2)

0

($27,000)

($14,000)

1

($27,000)

($14,000)

1

($2,900)

($2,300)

0.900900901

($2,613)

($2,072)

2

($2,900)

($2,300)

0.811622433

($2,354)

($1,867)

3

($2,900)

($2,300)

0.731191381

($2,120)

($1,682)

4

($2,900)

($2,300)

0.658730974

($1,910)

($1,515)

5

($23,900)

($13,800)

0.593451328

($14,183)

($8,190)

6

($2,900)

($2,300)

0.534640836

($1,550)

($1,230)

7

($2,900)

($2,300)

0.481658411

($1,397)

($1,108)

8

($2,900)

($2,300)

0.433926496

($1,258)

($998)

9

($2,900)

($2,300)

0.390924771

($1,134)

($899)

10

($23,900)

($13,800)

0.352184479

($8,417)

($4,860)

11

($2,900)

($2,300)

0.317283314

($920)

($730)

12

($2,900)

($2,300)

0.285840824

($829)

($657)

13

($2,900)

($2,300)

0.257514256

($747)

($592)

14

($2,900)

($2,300)

0.231994825

($673)

($534)

15

$3,100

$200

0.209004347

$648

$42

NPW

($66,458)

($40,891)

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