Question

Two mutually exclusive projects are being considered:

Project Uno has a first cost of $12,500, creates $5000 in annual savings, and has a salvage value of $2000 at the end of its 4 years useful life.

Project Dos has a first cost of $25,000, creates $8000 in annual savings, and has a salvage value of $4000 at the end of its 8 years useful life.

The MARR is 10% per year. At the end of useful life, both projects can be replaced identically.

Which of the following set of equations will solve for the NPW that allows you to make decision based on NPW analysis.

1.
Uno: PW = -12,500 + 5000(P/A, 10%, 4) + 2000(P/F, 10%, 4)
Dos: PW = [-25,000 + 8000(P/A, 10%, 8) + 4000(P/F, 10%, 8)]/2

2.
Uno: PW = -12,500 + 5000(P/A, 10%, 16) + (2000-12,500)(P/F, 10%, 4) + (2000-12,500)(P/F, 10%, 8) + (2000-12,500)(P/F, 10%, 12) + 2000(P/F, 10%, 16)
Dos: PW = -25,000 + 8000(P/A, 10%, 16) + (4000-25,000)(P/F, 10%, 8) + 4000(P/F, 10%, 16)

3.
Uno: PW = 2[-12,500 + 5000(P/A, 10%, 4) + 2000(P/F, 10%, 4)]
Dos: PW = -25,000 + 8000(P/A, 10%, 8) + 4000(P/F, 10%, 8)

4.
Uno: PW = -12,500 + 5000(P/A, 10%, 4) + 2000(P/F, 10%, 4)
Dos: PW = -25,000 + 8000(P/A, 10%, 4) + (4000/2)(P/F, 10%, 4)

5.
Uno: PW = -12,500 + 5000(P/A, 10%, 4) + 2000(P/F, 10%, 4)
Dos: PW = -25,000 + 8000(P/A, 10%, 8) + 4000(P/F, 10%, 8)

6.
Uno: PW = -12,500 + 5000(P/A, 10%, 8) + 2000(P/F, 10%, 8)
Dos: PW = -25,000 + 8000(P/A, 10%, 8) + 4000(P/F, 10%, 8)

7.
Uno: PW = -12,500 + 5000(P/A, 10%, 8) + (2000-12,500)(P/F, 10%, 4) + 2000(P/F, 10%, 8)
Dos: PW = -25,000 + 8000(P/A, 10%, 8) + 4000(P/F, 10%, 8)

8.
Uno: PW = -12,500 + 5000(P/A, 10%, 4) + 2000(P/F, 10%, 4)
Dos: PW = -25,000 + 8000(P/A, 10%, 4) + 4000(P/F, 10%, 4)

Answer 1

5. Uno: PW = -12,500 + 5000 (P/A, 10%, 4) + 2000 (P/F, 10%, 4)

Dos: PW = -25,000 + 8000 (P/A, 10%, 8) + 4000 (P/F, 10%, 8)

Step-by-step explanation:

Net present value is the difference between present value of cash inflows and the present value cash outflows over the period of time. NPV method is used in capital budgeting to analyze profitability of the project.

The project Uno has cash outlay of 12,500 at year 1 and cash inflows of 5000 for 4 years. There is additional cash inflow of 2000 at year 4 for the salvage value of equipment.

The project Dos has cash outlay of 25,000 at year 1 and cash inflows of 8000 for 4 years. There is additional cash inflow of 4000 at year 4 for the salvage value of equipment.