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.

   B1       B2  
n   Cash Flow   Salvage Value   Cash Flow   Salvage Value
0   -$23,000   -   -$24,000   -
1   -2,300   11,500   -1,600   8,000
2   -2,300   9,500   -1,600   5,500
3   -2,300   6,500   -1,600   3,500
4   -2,300   4,500   -   -
5   -2,300   4,000   -   -

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

​$________

thousand.​ (Round to one decimal​ place.)

Answer 1

n	B1	B2
Cash Flow	Salvage Value	Cash Flow	Salvage Value
0	-23000	--	-24000	--
1	-2300	11500	-1600	8000
2	-2300	9500	-1600	5500
3	-2300	6500	-1600	3500
4	-2300	4500	--
5	-2300	4000	--

Here the present worth analysis period is 15 years. The present worth of B1 can be calculated as follows

Present Worth of B1 = -23000 -2300(P/A, 11%,15) - 23,000(P/F, 11%,5) +4000(P/F, 11%,5) -23,000(P/F, 11%, 10) + 4000(P/F, 11%, 10) + 4000(P/F, 11%, 15)

= -23,000 -2300(P/A,11%,15) -19,000[(P/F,11%,5)+19,000(P/F,11%,10)]+4000(P/F,11%,15)

=-23,000 - 2300X7.19086 -19,000X(0.1606x5.8892) +4000X0.2090

=-56673.28

Present worth of B2 = -24,000-1600(P/A, 11%,15)-(24000-3500)(A/F,11%,3)(P/A,11%,12)+3500(P/F,11%,15)

= -24,000 -1600X7.19086 -20500X(0.2992x6.49235) +3500X0.209

=-74595.35

B1 has less present worth cost compared to B2, so B1 is abetter choice.

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