Two mutually exclusive projects have the estimated cash flows shown below. Use f
ID: 1094664 • Letter: T
Question
Two mutually exclusive projects have the estimated cash flows shown below. Use future worth analysis to determine which should be selected at an interest rate of 10% per year.
Project A
Project B
Initial Cost, $
-42,000
-80,000
Annual Cost, $/year
-6000
-5000 year1,
increasing by $1000 per year
Salvage value, $
1,000
7,000
Life, years
2
4
Which of the following statements is true?
Two projects have the same life cycle of 4 years.
The future worth of project A is -$135,945.75.
Project B should be selected.
The future worth of project B is -$139,743.37.
Project A
Project B
Initial Cost, $
-42,000
-80,000
Annual Cost, $/year
-6000
-5000 year1,
increasing by $1000 per year
Salvage value, $
1,000
7,000
Life, years
2
4
Explanation / Answer
FV for project A = ($42,000)*(1 + 0.1)2 + ($6,000)*(1 + 0.1)1 + ($6,000)*(1 + 0.1)0 + $1,000
= $(62,420)
FV for project B = ($80,000)*(1 + 0.1)4 + ($5,000)*(1 + 0.1)3 + ($6,000)*(1 + 0.1)2 + $7,000*(1 + 0.1)1 + $8,000*(1 + 0.1)0 + $7000
= $(139,743.37)
The true statement is
D. The future worth of project B is -$139,743.37.
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