Use cash flow to solve. my book is engineering economic analysis 11th newman..?
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Question
Use cash flow to solve. my book is engineering economic analysis 11th newman..?
Two mutually exclusive alternatives are being considered. Both have lives of 5 years. Alternative A has first cost $3000, annual benefits of $800 and a salvage value of $1000. Alternative B costs $7000 and has annual benefits of $1750 and a salvage value of $2500. Use a MARR of 8%. Which alternative should be selected? Solve the problem based on : Net Present Value analysis, Incremental rate of return analysis, Set-up the equation required to perform a sensitivity analysis on initial cost of the current selection.Explanation / Answer
a) Alternative A
annual cash flows for year 1-4 = 800
annual cash flows for year 5 = 800+1000= $1800
Net present value of A = -3000 + 800/1.08 + 800/1.08^2 + 800/1.08^3 + 800/1.08^4 + 1800/1.08^5 =$874.75
Alternative B
annual cash flows for year 1-4 = 1750
annual cash flows for year 5 = 1750+2500= $4250
Net present value of B = -7000 + 1750/1.08 + 1750/1.08^2 + 1750/1.08^3 + 1750/1.08^4 + 4250/1.08^5=$1688.70
b)For IRR NPV= 0
For A
-3000 + 800/(1+ra) + 800/(1+ra)^2 + 800/(1+ra)^3 + 800/(1+ra)^4 + 1800/(1+ra)^5 =0
ra= 17.20%
For B
-7000 + 1750/(1+rb) + 1750/(1+rb)^2 + 1750/(1+rb)^3 + 1750/(1+rb)^4 + 4250/(1+rb)^5=0
rb = 15.57%
c) Equation for sensitivity analysis
Net present value of A = -Initial Cost + 800/1.08 + 800/1.08^2 + 800/1.08^3 + 800/1.08^4 + 1800/1.08^5
Net present value of A = -Initial Cost + $3874.75
Net present value of B = -Initial Cost + 1750/1.08 + 1750/1.08^2 + 1750/1.08^3 + 1750/1.08^4 + 4250/1.08^5
Net present value of B= -Initial Cost + $8688.70
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