Compare the alternatives C and D on the basis of a present worth analysis using an interest rate of 10% per year and a study period of 10 years. Alternative C D First cost, $ −40,000 −32,000 AOC, $/year −7,000 −3,000 Annual increase in operating cost, $/year −1,000 — Salvage value, $ 9,000 500 Life, years 10 5

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A:

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A: PRESENT VALUE FORMULA: present value=-initial cost-annual cost×P/A,r%,n+salvage value×P/F,r%,n

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.