Question

Consider the three mutually exclusive alternatives below. Determine which alternative is preferable at an interest rate of 9% per year.

Alternative A B C
Capital Investment $400,000 $230,000 $150,000
Annual Expense $189,000 $122,500 $134,000
Annual Revenue $309,000 $222,500 $234,000
Salvage Value $65,000 $180,000 $130,000
Life (Years) 24 5 12

Required:
a. What is the AW for project M?
b. What is the AW for project N?
c. What is the AW for project P?

Answer 1

a. AW, A($) = 79646

b. AW, B ($) = 29,367

c. AW, C ($) = 80738

Step-by-step explanation:

Solution:

First of let's sort out the data given for all three alternatives:

Alternative A:

Capital Investment = $400,000

Annual Expense = $189,000

Annual Revenue = $309,000

Salvage Value = $65,000

Life = 24 Years

Alternative B:

Capital Investment = $230,000

Annual Expense = $122,500

Annual Revenue = $222,500

Salvage Value = $180,000

Life = 5 Years

Alternative C:

Capital Investment = $150,000

Annual Expense = $134,000

Annual Revenue = $234,000

Salvage Value = $130,000

Life = 12 Years

a.

AW, A($) = - 400,000 x A/P(9%, 24) + (309,000 - 189,000) + 65,000 x P/F(9%, 24) x A/P(9%, 24)

AW, A($) = - 400,000 x 0.103 + 120,000 + 65,000 x 0.1264 x 0.103

AW, A($) = - 41,200 + 120,000 + 846.25

AW, A($) = 79646

b.

AW, B ($) = -230,000 x A/P(9%, 5) + (222,500 - 134,000)

AW, B ($) = -230,000 x 0.2571 + (222,500 - 134,000)

AW, B ($) = 29,367

c.

AW, C ($) = - 150,000 x A/P(9%, 12) + (234,000 - 134,000) + 130,000 x P/F(9%, 12) x A/P(9%, 12)

AW, C ($) = - 150,000 x 0.1397 + 100,000 + 130,000 x 0.3555 x 0.1397

AW, C ($) = - 20,955 + 100,000 + 1,692.50

AW, C ($) = 80738