2. (25 points) Th improve the production activities in his plant. The estimated

Question

2. (25 points) Th improve the production activities in his plant. The estimated initial investment and annual revenues are as shown below. If the proposals are all expected to have a life of five years with no salvage value, use the annual worth criteria with a MARR of 15% to determine which alternative should be selected. e production manager of a plant is considering four mutually exclusive proposals to Alternative Initial Cost Net Annual Income Salvage Value 10,000 $5,312 $1,000 $15,000 $6,209 $1,300 $20,000 $7,077 $1,800

Explanation / Answer

Note: In the table salvage value is given. But in the question it is written that the proposals are no salvage value. It is confusing. But i am calculating the AW without taking salvage value. If you want the salvage value should be added. Plz write it in the comment box. I will re calculate it.

AW of alternative B = -10,000(A/P, 15%, 5) + 5312

                               = -10,000(0.2983) + 5312

                               = -2983 + 5312

                               = $2329

AW of alternative C = -15,000(A/P, 15%, 5) + 6209

                               = -15,000(0.2983) + 6209

                               = -4474.5 + 6209

                               = $1734.5

AW of alternative D = -20,000(A/P, 15%, 5) + 7077

                               = -20,000(0.2983) + 7077

                               = -5966 + 7077

                               = $1111

Since, AW of alternative B is more than other two. So, alternatibe B should be selected.

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