Silver Lining Inc. is considering two projects. Project A requires an investment

Question

Silver Lining Inc. is considering two projects. Project A requires an investment of $41,000. Estimated annual receipts for 20 years are $25,000; estimated annual costs are $12,500. An alternative project, B, requires an investment of $80,000, has annual receipts for 20 years of $31,000, and has annual costs of $18,000. Assume both projects have a zero salvage value and that MARR is 10.0 percent/year. Projects are NOT mutually exclusive. What is the present worth of each project? Which project(s) should be chosen? Why?

Explanation / Answer

(a) Project A

Net annual benefit ($) = Annual receipts - Annual cost = 25,000 - 12,500 = 12,500

Present worth (PW) ($) = - 41,000 + 12,500 x PVIFA(10%, 20) = - 41,000 + 12,500 x 8.5136

= - 41,000 + 106,420

= 65,420

(b) Project B

Net annual benefit ($) = 31,000 - 18,000 = 13,000

PW ($) = - 80,000 + 13,000 x PVIFA(10%, 20) = - 80,000 + 13,000 x 8.5136

= - 80,000 + 110,677

= 30,677

(c) Both projects have positive PW. Since they are not mutually exclusive, both of them can be chosen. But with capital rationing, project A should be chosena s it has higher PW.

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