(a):
Compare the project based on future worth.
(a):
Explanation of Solution
Table-1 shows the cash flow of different projects.
Table -1
Projects | A | B | C |
First cost (C) | 40,000 | 80,000 | 130,000 |
Annual cost (AC) per year | 9,000 | 6,000 | 4,000 |
Salvage value (SV) | 10% to C | ||
Time period (n) | 2 | 4 | 8 |
Interest rate (i) is 10%.
The time period for project A should be equated with project time period C. Thus, all the cash flows are repeated for other 6 years. The time period 1 (n) is 8 years, time period 2 (n1) is 6 years, time period 3 (n2) is 4 years, and time period 4 (n3) is 2 years.
The future worth of project A is -$366,493.01.
The time period for project B should be equated with project time period C. Thus, all the cash flows are repeated for other 4 years. The time period 1 (n) is 8 years and time period 2 (n1) is 4 years.
Future value project B (FWB) can be calculated as follows:
The future worth of project B is -$357,230.46.
Future value project C (FWC) can be calculated as follows:
The future worth of project C is -$311,410.13. Since the future worth of project C is greater than the other available projects, select project C.
(b):
Compare the projects based on the present worth.
(b):
Explanation of Solution
Present worth of project A (PWA) can be calculated as follows:
Present worth of project A is -$170,971.68.
Present worth of project B (PWB) can be calculated as follows:
Present worth of project B is -$166,650.63.
Present worth of project C (PWC) can be calculated as follows:
Present worth of project C is -$145,275.11. Since the present worth of project C is greater than the other two projects, select project C.
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