Question

Given the following alternatives and cash flows:

Alternative #1 has an investment of $25,000 and an annual income of $6,000/year for eight years.

Alternative #2 has an investment of $35,000 and an annual income of $12,500/year for four years


If MARR = 12% What is the the difference in present worth AW₂ - AW₁ assuming repeatability?

		-$1,631
		$9
		$1,631
		-$1,839

Answer 1

NPV of Alternative #1

Net Present Value = Present Value of annual cash inflows – Initial Investment

= $6,000[PVIFA 12%, 8 Years] - $25,000

= [$6,000 x 4.96764] - $25,000

= $29,806 – 25,000

= $4,806

Annual Worth = Net Present Value / [PVIFA 12%, 8 Years]

= $4,806 / 4.96764

= $968

NPV of Alternative #2

Net Present Value = Present Value of annual cash inflows – Initial Investment

= $12,500[PVIFA 12%, 5 Years] - $35,000

= [$12,500 x 3.03735] - $35,000

= $37,967 - $35,000

= $2,967

Annual Worth = Net Present Value / [PVIFA 12%, 5 Years]

= $2,967 / 3.03735

= 977

The difference in present worth AW2 - AW1

The difference in present worth AW2 - AW1 = AW - Alternative #2 - AW - Alternative #1

= $977 – 968

= $9

“The difference in present worth AW2 - AW1 = $9”