Two financial choices are available. We will compare them using the standard cri

Question

Two financial choices are available. We will compare them using the standard criteria that the Annual Worth of one is greater than the annual worth than the other. (A) The first choice has an initial investment of 40,000. It generates a yearly revenue of 18000 and at the end of three years has a salvage value of 6000. (B) The second choice has an initial investment of 30,000. It generates a yearly revenue of 12000 and at the end of 6 years has a salvage value of 4000. The interest rate environment is 3%. The management wishes the Time Horizon to be 24 years and assume exact repetition of the choice after each time period is completed. Analyze the two choices using Annualized Worth.

Explanation / Answer

Year Option-1(Outflow) Option-1(Inflow) Option-1(Net) Option-1(PV) Option-2(Outflow) Option-2(Inflow) Option-2(Net) Option-2(PV) 0 40000 -40000 -40000.00 30000 -30000 -30000.00 1 18000 18000 17475.73 12000 12000 11650.49 2 18000 18000 16966.73 12000 12000 11311.15 3 40000 24000 -16000 -14642.27 12000 12000 10981.70 4 18000 18000 15992.77 12000 12000 10661.84 5 18000 18000 15526.96 12000 12000 10351.31 6 40000 24000 -16000 -13399.75 30000 16000 -14000 -11724.78 7 18000 18000 14635.65 12000 12000 9757.10 8 18000 18000 14209.37 12000 12000 9472.91 9 40000 24000 -16000 -12262.67 12000 12000 9197.00 10 18000 18000 13393.69 12000 12000 8929.13 11 18000 18000 13003.58 12000 12000 8669.06 12 40000 24000 -16000 -11222.08 30000 16000 -14000 -9819.32 13 18000 18000 12257.12 12000 12000 8171.42 14 18000 18000 11900.12 12000 12000 7933.41 15 40000 24000 -16000 -10269.79 12000 12000 7702.34 16 18000 18000 11217.00 12000 12000 7478.00 17 18000 18000 10890.30 12000 12000 7260.20 18 40000 24000 -16000 -9398.31 30000 16000 -14000 -8223.52 19 18000 18000 10265.15 12000 12000 6843.43 20 18000 18000 9966.16 12000 12000 6644.11 21 40000 24000 -16000 -8600.79 12000 12000 6450.59 22 18000 18000 9394.07 12000 12000 6262.71 23 18000 18000 9120.45 12000 12000 6080.30 24 24000 24000 11806.41 16000 16000 7870.94 Total 98225.60 119911.51 Annuity PV factor for i=3% and n=24 years is 16.9355 So annualised worth of Option-1 =98225.60/16.9355 5799.98 So annualised worth of Option-2 =119911.51/16.9355 7080.48

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