Question

Two solutions are investigated for a safety program Soution 1 First cost ---25,000 annual maintenance cost 4,000 Life -- 2years Solution 2 First cost ---88,000 annual maint 1400 Life 6 years Neither project has a salvage value Compare the two solutions using present value using 15% interest- what is present cost of solution 2

Answer 1

Present value for solution 2 = $93,298.28

Solution 1 has a lower cost compared to solution 2. Solution 1 would be more desirable based on the lower cost

Step-by-step explanation:

Present value is the sum of discounted cashflows

Solution 1

Cash flow in year 0 = 25,000

Cash flow in year 1 and 2 = 4,000

I = 15%

Present value = $31,502.84

Solution 2

Cash flow in year 0 = 88,000

Cash flow in year 1 and 6 = 1,400

I = 15%

Present value = $93,298.28

Solution 1 has a lower cost compared to solution 2. Solution 1 would be more desirable based on the lower cost

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute