Question

One of two methods must be used to produce expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $30,000 per year. Method B will have a first cost of $120,000, an operating cost of $8000 per year, and a $40,000 salvage value after its 3-year life. At an interest rate of 12% per year, which method should be used on the basis of a present worth analysis?

Answer 1

Answer:

Method b

Explanation:

Present worth can be calculated using a financial calculator

For method A ,

Cash flow in year 0 = $80,000

Cash flow in year 1 and 2 = $30,000

Cash flow in year 3 = $30,000 - $15,000 = $15,000

I = 12%

Present worth = $141,378.23

For method B,

Cash flow in year 0 = $120,000

Cash flow in year 1 and 2 = $8, 000

Cash flow in year 3 = $8,000 - $40,000 = $-32,000

I = 12%

Present worth = $110,743.44

Method b would is chosen because it worth less.

To find the present worth using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute