Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
Question
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Chapter 2, Problem 76APQ
To determine

Calculate the equivalent annual value.

Expert Solution & Answer
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Explanation of Solution

First year cash flow (CF1) is $800. Cash flow decreases (G) by 100 per year per year. Interest rate (i) is 8%. Time period (n) is 6 years.

Option (c):

Equivalent annual value (A) can be calculated as follows.

A=CF1G(1in(1+i)n1)572=800100(10.086(1+0.08)61)572=800100(12.561.58691)572=800100(12.510.2232)572=800100(2.2768)572=800227.68572572.32

Since the calculated equivalent annual value is nearly equal to the given value, Option (c) is correct.

Option (a):

Equivalent annual value (A) can be calculated as follows:

A=CF1G(1in(1+i)n1)302=800100(10.086(1+0.08)61)302=800100(12.561.58691)302=800100(12.510.2232)302=800100(2.2768)302=800227.68302<572.32

Since the calculated equivalent annual value is greater than the given value, option ‘a’ is incorrect.

Option (b):

Equivalent annual value (A) can be calculated as follows:

A=CF1G(1in(1+i)n1)421=800100(10.086(1+0.08)61)421=800100(12.561.58691)421=800100(12.510.2232)421=800100(2.2768)421=800227.68421<572.32

Since the calculated equivalent annual value is greater than the given value, option ‘b’ is incorrect.

Option (d):

Equivalent annual value (A) can be calculated as follows:

A=CF1G(1in(1+i)n1)824=800100(10.086(1+0.08)61)824=800100(12.561.58691)824=800100(12.510.2232)824=800100(2.2768)824=800227.68824>572.32

Since the calculated equivalent annual value is less than the given value, option ‘c’ is incorrect.

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Chapter 2 Solutions

Engineering Economy

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