Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
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Chapter 18, Problem 39P
To determine

Calculate the present worth.

Expert Solution & Answer
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Explanation of Solution

Time period is denoted by ‘n’ and MARR is denoted by ‘i’. The present worth (PW) for the option ‘invest now’ can be calculated as follows:

PW=First cost+((RevenuePessimistic×(PPessimistic))+(RevenueMost likely×(PMost likely))+(RevenueOptimistic×(POptimistic)))((1+i)n1i(1+i)n)=80,000,000+((35,000,000×(13))+(25,000,000×(13))+(10,000,000×(13)))((1+0.12)510.12(1+0.12)5)=80,000,000+(11,666,667+8,333,333+3,333,333)(3.6048)=4,111,999

The present worth is $4,111,999.

The present worth (PW) for option ‘invest later’ can be calculated as follows.

PW=(Cost+Revenue(1(1+i)1)First cost(1(1+i)1)+((RevenuePessimistic×(PPessimistic))+(RevenueMost likely×(PMost likely)))((1+i)41i(1+i)4)(1(1+i)1))=(4,000,000+900,000(1(1+0.12)1)800,000,000(1(1+0.12)1)+((35,000,000×(12))+(25,000,000×(12)))((1+0.12)410.12(1+0.12)4)(1(1+0.12)1))=(4,000,000+900,000(0.8929)80,000,000(0.8929)+(17,500,000+12,500,000)(3.0373)(0.8929))=6,731.675

The present worth is $6,731,675. Since the present worth for the ‘invest later’ option is greater, select option ‘invest later’.

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