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 20,000. It generates a yearly revenue of 10000 and at the end of three years has a salvage value of 2000. (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

Option 1 ) Present value of cash flow =(PVAF@3%,3*Revenue)+ (PVF@3%,3* Salvage)

                    = (2.82861 * 10000) + (.91514 * 2000)

                    = 28286.11+ 1830.28

                     = 30116.39

NPB = 30116.39 - 20000 = 10116.39

Equated NPV= NPV /PVAF@3%,3 = 10116.39 / 2.82861 = $3576.45

option 2 )Present value =(PVAF@3%,6 *Revenue)+(PVF@3%,6 *Salvage)

                = (5.41719* 12000) + (.83748*4000)

                = 65006.30+ 3349.92

               = 68356.22

NPV = 68356.22 -30000 = 38356.22

Equated NPV = 38356.22 / 5.41719 = 7080.46

Option 2 is better as it has highest equated NPV

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