You have been asked to evaluate two alternatives, X and Y, that may increase pla

Question

You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for manufacturing high-pressure hydraulic hoses. The parameters associated with each alternative have been estimated. Which one should be selected on the basis of a present worth comparison at an interest rate of 12% per year? Why is yours the correct choice?

The present worth of alternative X is( $ )and that of alternative Y is( $ )

Alternative X Y First Cost $-45,000 $-58,000 Maintenance cost, per Year $-8000 $-4000 Salvage Value $2,000 $12,000 Life 5 years 5 years

Explanation / Answer

Present Worth can be calculated using PV function on a calculator

For X, N = 5, I/Y = 12%, PMT = -8,000, FV = 2,000 => PV = 27,703.36

and we need to add the initial cost, hence PW = 27,703.36 + 45,000 = $72,703.36 (with a negative sign as these are costs)

For Y, N = 5, I/Y = 12%, PMT = -4,000, FV = 21,000 => PV = 7,609.98

and PW = 7,609.98 + 58,000 = $65,609.98

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