Question

Choose between the following two scenarios. Base your decision on Annualized Worth AW. Show the details...

Choose between the following two scenarios. Base your decision on Annualized Worth AW. Show the details of the calculation for full credit.

A         Initial Cost 120,000      I = 6 %    Revenue per year 80,000

              Maintenance Expenses First year 4000   grows each year by 1500 ( G = 1500 / yr)

                Operating Expenses     First year 6000 grows each year by 500.

           Planning Horizon 20 years.   Salvage Value 10,000.

B          Initial Cost 400,000    I = 3%  

              Revenue     First Year 600,000   Decreases Each year by 30,000/yr ( G = -30,000)

              Operating Expenses uniform at 50,000 per year

             Maintenance expenses uniform at 40,000 per year

          Planning Horizon 12 yrs     Salvage Value 100,000.

Homework Answers

Answer #1

SOLUTION:-

AW of A = -120000*(A/P,6%,20) + 80000 - 4000 - 1500*(A/G,6%,20) - 6000 - 500*(A/G,6%,20) + 10000*(A/F,6%,20)

= -120000*0.087185 + 80000 - 4000 - 1500*7.605148 - 6000 - 500*7.605148 + 10000*0.027185

= 44599.35

AW of B = -400000*(A/P,3%,12) + 60000 - 30000*(A/G,3%,12) - 50000 - 40000 + 100000*(a/F,3%12)

= -40000*0.100462 + 60000 - 30000*5.148499 - 50000 - 40000 + 100000*0.070462

= 322406.43

As AW of B is more, it should be selected.

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