Two mutually exclusive projects have the estimated cash flowsshown below. Use an
ID: 2770819 • Letter: T
Question
Two mutually exclusive projects have the estimated cash flowsshown below. Use an annual worth analysis to determine which shouldbe selected at an interest rate of 10% per year.
Project A
Project B
Initial Cost, $
-42,000
-80,000
Annual Cost, $/year
-6000
-5000 year1,
increasing by $1000per year
Salvage value, $
1,000
7,000
Life, years
2
4
Project A
Project B
Initial Cost, $
-42,000
-80,000
Annual Cost, $/year
-6000
-5000 year1,
increasing by $1000per year
Salvage value, $
1,000
7,000
Life, years
2
4
Explanation / Answer
Project A
AW = -$42,000 (A/P, 10%, 2) -$6,000 + $1,000(A/F, 10%, 2)
= -$42,000 (0.5762028) - $6,000 + $1,000 (0.4761904)
= -$24,200.5176 - $6,000 + $476.1904
AW = -$29,724.32
Project B
AW = -$80,000 (A/P, 10%, 4) -$5,000 -$1,000(P/G, 10%, 4) + $7,000 (A/F, 10%, 4)
= -$80,000 (0.315467) - $5,000 - $1,000 (4.378118) +$7,000 (0.2154708)
= -$25,237.36 - $5,000 - $4,378.118 + $1,508.29
AW = -$33,107.18
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