Question

Drain Your Brain, a local video arcade, is considering the addition of a new virtual reality system. Several different vendors have been contacted. The owner of the arcade, affectionately referred to by the patrons as Wizard, has narrowed his selection to one of three choices (mutually exclusive alternatives). The data below describes the three systems under evaluation. Annual costs are based on electricity consumed, replacement parts based on use, and preventive maintenance. Revenue estimates are provided by the vendors based on regional data and relative thrill as compared to other arcade games and a cost of $1.00 per play

System A System B System C

Initial costs $13,000 $11,000 $15,000

Annual costs $6,800 $5,800 $7,500

Annual revenues $11,000 $10,000 $12,200

Salvage value at the end of useful life $2,000 $1,000 $2,000

Useful life 5 years 4 years 6 years

Question:

1) Which method (PW, AW, FW, IRR) would be best (easiest) to use to select the preferred alternative?

2) What is the implicit study period for this problem?

3) Which alternative should be selected when MARR is 20%?

Answer 1

1. AW method would be the easiest

2. implicit study period would be 60 years (LCM of 4,5,6)

3. MARR = 20%

AW of system A = -13000*(A/P,20%,5) + 11000 - 6800 + 2000*(A/F,20%,5)

= -13000*0.334379 + 11000 - 6800 + 2000*0.134379

= 121.83

AW of system B = -11000*(A/P,20%,4) + 10000 - 5800 + 1000*(A/F,20%,4)

= -11000*0.386289 + 10000 - 5800 + 1000*0.186289

= 137.11

AW of system C = -15000*(A/P,20%,6) + 12200 - 7500 + 2000*(A/F,20%,6)

= -15000*0.300705 + 12200 - 7500 + 2000*0.100705

= 390.83

System C should be selected as it has highest AW