A maintenance company is offering a firm two payments plans, A and B for a machi

Question

A maintenance company is offering a firm two payments plans, A and B for a machine. In plan A, duration four years, firm has to pay annual uniform payment of $480. In plan B, duration five years, firm has to pay monthly uniform payments of $50. The nominal interest rate is 6% compounded Annually for plan A and for plan B. Using AW method, which plan would you recommend? A given business has a useful life of 4 years. The market value at the end of the fourth year is $4000. If the MARR is 12% and estimated cash flow data s follow:

Explanation / Answer

AW = P {(1+r)n-1}/r

where P =periodic payment; r = rate per period and n = number of periods.

Plan A : AW = 480 {(1+0.06)4-1}/0.06 =  $2099.816

Plan B : AW = 50 {(1+0.06/12)5*12-1}/0.06/12 = $3488.50

Payment with plan A is lesser hence plan A will be recommended.

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