Two hazardous environment facilities are being evaluated, with the projected lif
ID: 1180249 • Letter: T
Question
Two hazardous environment facilities are being evaluated, with the projected life of
each facility being 10 years. The cash flows for each facility are shown in the table
below.
The company uses a MARR of 14%. Based on the rate of return, which is the most
desirable alternative?
Cash Flows Alternatives
A B
First Cost $450,000 $615,000
M & O Costs $15,000 $10,000
Annual Benefit $85,000 $158,000
Salvage Value $45,000 $65,000
Explanation / Answer
NPV of A = -450000-15000+85000/1.14 + 85000/1.14^2 + 85000/1.14^3 + 85000/1.14^4 + 85000/1.14^5 + 85000/1.14^6 + 85000/1.14^7 + 85000/1.14^8 + 85000/1.14^9 + 85000/1.14^10 + 45000/1.14^10 =-$9491.70
NPV of B = -615,000-10000+158000/1.14 + 158000/1.14^2 + 158000/1.14^3 + 158000/1.14^4 + 158000/1.14^5 + 158000/1.14^6 + 158000/1.14^7 + 158000/1.14^8 + 158000/1.14^9 + 158000/1.14^10 + 65000/1.14^10 =$216,679.62
B has higher NPV
B is the most
desirable alternative
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