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Consider the two mutually exclusive projects in the table below. Salvage values represent the
net proceeds (after tax) from disposal of the assets if they are sold at the end of each year. Both
projects B1 and B2 will be available (or can be repeated) with the same costs and salvage values
for an indefinite period EE Click the icon to view the additional data about the mutually
exclusive projects Click the icon to view the interest factors for discrete compounding when
MARR-11% per year (a) Assuming an infinite planning horizon, which project is a better choice
at MARR= 11%? Use 15 years as the common analysis period The present worth for project B1
is S? thousand. (Round to one decimal place.) More Info B1 Salvage Value B2 Cash Flow Cash
Flow Salvage Value 0 -$27,000 13,500 12,000 9,000 7,000 6,000 - $14,000 - 2,300 -2,300 -
2,300 - 2,900 -2,900 - 2,900 -2,900 - 2,900 7,000 4,500 2,500 4
Solution
Present worth of Project B1 is ($66,458)
Present worth of Project B2 is ($40,891)
Hence Project B2 is a better choice at MARR of 11 %
Explanation:
Project B1
Project B2
Project B1
Project B2
Year
Cash Flow (CB1)
Cash Flow (CB2)
PV Factor @ 11 % (F)
PV (= F x CB1)
PV (= F x CB2)
0
($27,000)
($14,000)
1
($27,000)
($14,000)
1
($2,900)
($2,300)
0.900900901
($2,613)
($2,072)
2
($2,900)
($2,300)
0.811622433
($2,354)
($1,867)
3
($2,900)
($2,300)
0.731191381
($2,120)
($1,682)
4
($2,900)
($2,300)
0.658730974
($1,910)
($1,515)
5
($23,900)
($13,800)
0.593451328
($14,183)
($8,190)
6
($2,900)
($2,300)
0.534640836
($1,550)
($1,230)
7
($2,900)
($2,300)
0.481658411
($1,397)
($1,108)
8
($2,900)
($2,300)
0.433926496
($1,258)
($998)
9
($2,900)
($2,300)
0.390924771
($1,134)
($899)
10
($23,900)
($13,800)
0.352184479
($8,417)
($4,860)
11
($2,900)
($2,300)
0.317283314
($920)
($730)
12
($2,900)
($2,300)
0.285840824
($829)
($657)
13
($2,900)
($2,300)
0.257514256
($747)
($592)
14
($2,900)
($2,300)
0.231994825
($673)
($534)
15
$3,100
$200
0.209004347
$648
$42
NPW
($66,458)
($40,891)
Project B1:
Cash flow for year 5 = Annual expenses + Salvage value + Initial investment
= -$ 2,900 + $ 6,000 - $ 27,000 = $ 23,900
Cash flow for year 15 = -$ 2,900 + $ 6,000 = $ 3,100
Project B2:
Cash flow for year 5 = Annual expenses + Salvage value + Initial investment
= -$ 2,300 + $ 2,500 - $ 14,000 = $ 13,800
Cash flow for year 15 = -$ 2,300 + $ 2,500 = $ 200
Project B1
Project B2
Project B1
Project B2
Year
Cash Flow (CB1)
Cash Flow (CB2)
PV Factor @ 11 % (F)
PV (= F x CB1)
PV (= F x CB2)
0
($27,000)
($14,000)
1
($27,000)
($14,000)
1
($2,900)
($2,300)
0.900900901
($2,613)
($2,072)
2
($2,900)
($2,300)
0.811622433
($2,354)
($1,867)
3
($2,900)
($2,300)
0.731191381
($2,120)
($1,682)
4
($2,900)
($2,300)
0.658730974
($1,910)
($1,515)
5
($23,900)
($13,800)
0.593451328
($14,183)
($8,190)
6
($2,900)
($2,300)
0.534640836
($1,550)
($1,230)
7
($2,900)
($2,300)
0.481658411
($1,397)
($1,108)
8
($2,900)
($2,300)
0.433926496
($1,258)
($998)
9
($2,900)
($2,300)
0.390924771
($1,134)
($899)
10
($23,900)
($13,800)
0.352184479
($8,417)
($4,860)
11
($2,900)
($2,300)
0.317283314
($920)
($730)
12
($2,900)
($2,300)
0.285840824
($829)
($657)
13
($2,900)
($2,300)
0.257514256
($747)
($592)
14
($2,900)
($2,300)
0.231994825
($673)
($534)
15
$3,100
$200
0.209004347
$648
$42
NPW
($66,458)
($40,891)

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