IENG 302: Net Present Worth - inked soln

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Example Problem
A company is considering the purchase of a new
piece of testing equipment that is expected to
produce 8,000 additional income during the first
year of operation. This amount will decrease by
500 per year for each subsequent year of
ownership. The equipment costs 20,000 and
will have an estimated salvage value of 3,000
after 8 years of use. For a MARR of 15
compounded annually, determine the net present
worth of this investment.
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Problem 2
Project 1 costs 10,000 and has annual, end of
the year revenues of 10,000 over its 5 year
life. There is no salvage value. Project 2
costs 20,000 and has annual end of year revenues
of 10,000 over its 10 year life. There is no
salvage value. Conduct an economic analysis to
select the preferred project using a MARR of 15
per year, compounded annually.
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Calculating NPWs
NPW1 23,522 NPW2 30,188 Why is it wrong
to select Project 2 based on this analysis?
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(Net) Present Worth Analysis
Two possible approaches when project lives are
different Common Multiple Period Projects are
assumed to be repeated until a common multiple
point in time is established. Study Period
Select a study period for both projects and
estimate cash flows to conform to the study
period.
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Problem 3
A firm is considering the purchase of one of two
new machines. The data on each are as
below Machine A B Service
Life 3 years 6 years Initial
Cost 3,400 6,500 Annual Net Operating
Expense 2,000 1,800 Salvage
Value 100 500 Use a MARR of 12 compounded
annually and the lowest common multiple
assumption to determine the alternative to be
selected.
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Machine A B Service Life 3
years 6 years Initial Cost 3,400 6,500 Annua
l Net Operating Expense 2,000 1,800 Salvage
Value 100 500 MARR is 12 compounded annually
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Problem 4
Two alternatives are being considered regarding
construction of a new high-voltage transmission
line. Alternative I would build the transmission
towers and the line at a capacity of 230 kVA,
which is expected to be adequate for 15 years.
After 15 years the 230 kVA lines would be removed
and 560 kVA lines placed on the existing towers.
Alternative II would build the transmission
towers and the 560 kVA lines immediately. Given
below are the pertinent data on the costs of
these facilities. Expected Expected Item Pre
sent Cost Service Life Salvage Value Trans.
Towers 15,000,000 55 years 0 after 30 yrs 230
kVA lines 8,000,000 15 years 10 of 1st cost 560
kVA lines 12,000,000 35 years 10 of 1st
cost Salvage values for both transmission lines
are 10 of first cost regardless of age at
retirement. The cost of 560 kVA lines will
inflate at the rate of 10 per year. The MARR is
15. Use Present Worth analysis to determine
which alternative is least expensive for a 35
year study period.