Question

. Alternative A has a first cost of $20,000, an operating cost of $9,000 per year, and a $5,000 salvage value after 5 years. Alternative B will cost $35,000 with an operating cost of $4,000 per year and a salvage value of $7,000 after 5 years. At an MARR of 12% per year, which should be selected

Answer 1

Answer and Explanation:

The computation is shown below:

NPW of X is

= -$20,000 - $9,000 × (P/A,12%,5) + $5,000 × (P/F,12%,5)

= -$20,000 - $9,000 × 3.604776 + $5,000 × 0.567427

= -$49,605.85

And,  

NPW of Y is

= -$35,000 - $4,000 × (P/A,12%,5) + $7,000 × (P/F,12%,5)

= -$35,000 - $4,000 × 3.604776 + $7,000 × 0.567427

= -$45,447.11

Based on the above calculations as we can see that net present cost of Y is lower than the net present cost of X so Y should be selected