Question

Your company is trying to decide which of the two following devices should be selected.

Device A: costs $1,000 but can save $300 annually

Device B: costs $1,350 but can save $300 the first year, but savings is increased $50 annually thereafter.

Both devices have 5-year useful life and no salvage value

1. Draw cash flow diagram for each option
2. If interest rate is 7%, which device should your company purchase?

Answer 1

a.

CFD of Device A

CFD of Device B

b.

NPW of device A = -1000 + 300*(P/A,7%,5)

= -1000 + 300*4.100197

= 230.06

NPW of device B = -1350 + 300*(P/A,7%,5) + 50*(P/G,7%,5)

= -1350 + 300*4.100197 + 50*7.646665

= 262.39

As PW of device B is more, it should be selected