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Finance SL1

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# Finance

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Sub: Finance Present Value of Project Cost Question:

Topic: Valuation of Operation

Your office mate performed a 10% per year Present Worth avaluation of two alternatives before she left on vacation. Now, your boss wants you to provide the results in Annual Worth terms. The PW analysis provided the following data: Present Value of Project Costs Life (years) PWA = PWB = \$(436,000) \$ (622,000) 5 8

a.

Which of the above should be selected on the basis of Annual Worth analysis at a rate of 10% per year?

b.

If you used a yearly rate of 8%, would your decision be the same? Justify your answer.

Solution:
B C Present Value of Project 2 3 PWA = 4 PWB = Costs -436000 -622000 Life (years) 5 8 D E

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Sub: Finance
Annuity Factor 10% for 5 years 5 and 8 years respectively Which of the above should be 6 selected on the basis of Annual Worth analysis at a 7 rate of 10% per year? AW of B AW of A

Topic: Valuation of Operation

3.791

5.335 ( PW / Annuity -115009.23 Factor) ( PW / Annuity -116588.57 Factor)

Project A Should (Least AW would 8 Based On AW be Selected. Be selected)

8% annuity Factor for 5 If you used a yearly rate of 8%, years and 8 years 9 would your decision be the same? Justify your 10 answer. AW of A -109191.08 Respectively 3.993 5.747 ( PW / Annuity Factor) ( PW / Annuity 11 AW of B -108230.38 Factor)

Project B Should (Least AW would 12 Based On AW be Selected. Be selected)

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Sub: Finance
B C

Topic: Valuation of Operation
D E

Present Value of Project 2 3 PWA = 4 PWB = Annuity Factor 10% for 5 5 years and 8 years respectively Which of the above should be 6 selected on the basis of Annual Worth analysis at a 7 rate of 10% per year? AW of B =C4/D5 AW of A =C3/C5 3.791 5.335 ( PW / Annuity Factor) ( PW / Annuity Factor) Costs -436000 -622000 Life (years) 5 8

Project A Should be (Least AW would 8 Based On AW 8% annuity Factor for 5 If you used a yearly rate of 9 8%, would your decision be the same? Justify your 10 answer. 11 AW of A AW of B =C3/D9 =C4/E9 years and 8 years Respectively 3.993 5.747 ( PW / Annuity Factor) Selected. Be selected)

( PW / Annuity

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Sub: Finance

Topic: Valuation of Operation
Factor) Project B Should be

12

Based On AW

Selected.

=E8

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Sub: Finance

Topic: Valuation of Operation

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