with cash flow diagram and formulas used in computations 1. A new structural des
ID: 1170808 • Letter: W
Question
with cash flow diagram and formulas used in computations
1. A new structural design software package is available for analyzing and designing three-sid ed guyed towers and $6000 three- and four-sided self-supporting towers. A single-user license will cost per year. A site license has a one-time cost of $22,000. A structural engineering consulting company is trying to decide between two alternatives: buy a single-user l and one each year for the next 3 years (which will provide 4 years of service), or buy a site license now, Determine which strategy should be adopted at an interest rate of 10% per year for a 4-year planning period using the annual worth method of evaluatio An 1Explanation / Answer
Alternative 1: Single user license for one year at an annual cost of $ 6000 per annum at the beginning of each year.
Interest Rate = 10 % and Planning Horizon = 4 years
Present Worth of Annual License Fee = 6000 + 6000 / (1.1) + 6000 / (1.1)^(2) + 6000 / (1.1)^(3) = $ 20921.11
The above fees constitute a cash outflow at the beginning of each year. This cash flow series needs to be converted into an equivalent series in which the cash outflows occur at the end of each year (instead of the beginning). Let the equivalent annual cash outflow at the end of each year be $ K.
Therefore, 20921.11 = K x (1/0.1) x [1-{1/(1.1)^(4)}]
K = $ 6599.99
Annual worth of alternative 1 = K = $ 6599.99
Alternative 2 : One time license fee of $ 22000
Let the annual equivalent cash outflow be $ M
Therefore, 22000 = M x (1/0.1) x [1-{1/(1.1)^(4)}]
M = $ 6940.36
Annual worth of alternative 2 = M = $ 6940.36
As the annual worth of alternative 1 is lower than that of alternative 2, the former strategy should be adopted.
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