
(a)
Compare the projects based on the present worth.
(a)

Explanation of Solution
Table -1 shows the cash flow of different projects.
Table -1
Projects | 1 | 2 |
First cost (C) | 400,000 | 600,000 |
Maintenance cost (MO) per year | 140,000 | 100,000 |
Salvage value (SV) | 10% to C | 10% to C |
Time period (n) | 3 | 6 |
MARR (i) is 15%.
The time period for project 1 should equate with project time period two. Thus, all the cash flows are repeated for other three years. The time period (n1) is six years and time period 2 (n2) is three years.
Present worth of the project 1 (PW1) can be calculated as follows:
The present worth of project 1 is -$1,149,240.64.
The present worth of the project 2 (PW2) can be calculated as follows:
The present worth of project 2 is -$952,508.85. Since the present worth of the project 2 is greater than project 1, select project 2.
(b)
Compare the projects based on the present worth.
(b)

Explanation of Solution
Present worth of project 1 (PW1) can be calculated as follows:
The present worth of project 1 with the wrong method is -$693,350.85. Since the present worth of project 1 is greater than project 2, select project 1. This decision is economically incorrect due to the wrong life time for project 1. When comparing the project, the life time of both projects should be equal.
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Chapter 5 Solutions
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