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. ​(a) Assuming an infinite planning​ horizon, which project is a better choice at MARR​%? Use 15 years as the common analysis period. The present worth for project B1 is _____ (Round to one decimal​ place.) The present worth for project B2 is ​$_____thousand.​ (Round to one decimal​ place.)

                                                                                                                                                                                                                                                                                                                                                                                                                                         

	B1				B2
n	Cash Flow		Salvage Value		Cash Flow		Salvage Value
0	−​$15,000		—		−​$30,000		—
1	−2,500		7,500		−2,700		6,500
2	−2,500		6,000		−2,700		3,500
3	−2,500		3,000		−2,700		1,000
4	−2,500		1,000		—		—
5	−2,500		500		—		—

Answer 1

SOLUTION:

a.

Analysis period = 15 yrs

NPW of B1 = -15000 -2500*(P/A,12%,15) - (15000-500)*((P/F,12%,5) + (P/F,12%,10)) + 500*(P/F,12%,15)

= -15000 -2500*6.810864 - (14500)*(0.567427 + 0.321973) + 500*0.182696

= (-15000-17027.16) - 12896.3 + 91.348

= -32027.16 -12896.3 + 91.348

= -44832.112 ~ -44.0 thousand

NPW of B2 = -30000 -2700*(P/A,12%,15) - (30000-1000)*((P/F,12%,3) + (P/F,12%,6) +(P/F,12%,9) + (P/F,12%,12)) + 1000*(P/F,12%,15)

= -30000 -2700*6.810864 - (30000-1000)*(0.711780 + 0.506631 + 0.360610 + 0.256675) + 1000*0.182696

= (-30000-18389.3328) - (29000)*(1.835696) + 182.696

= -48389.3328 -53235.184 + 182.696

= -101448.8208 ~ -101.4 thousand

As present cost of B1 is less, it should be selected