Question

# Given the following alternatives and cash flows: Alternative #1 has an investment of \$25,000 and an...

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

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”