Question

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.

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.

THANK YOU, if any queries please leave your valuable comment on comment box.........

If possible then rate the answer as well