Lecture6

What is the estimated market value of this project at

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Unformatted text preview: 00, useful life of 9 years, annual expenses of $1,720, and market (salvage) value of $5,000 at the end of its useful life. What is the estimated market value of this project at the end of year 5? The MARR is 20%. MV5 =[47,600(A/P,20%,9)5,000(A/F,20%,9)](P/A,20%,4)+5,000(P/F,20%,4)=$32,361. SEEM5740/ECLT5930 34 Example 6.7: Which of the following alternatives should be selected if the study period is 5 years and the MARR is 20%? Investment Annual expenses Useful life (years) Salvage value A 33,200 2,165 5 0 B 47,600 1,720 9 5,000 Alternative B is identical to the project in Example 6.8. The imputed market value of Alternative B at the end of year 5 was found to be $32,361. We can use the AW method to compare the alternatives: AW (20%)A = −33, 200(A/P, 20%, 5) − 2, 165 = −13, 267. AW (20%)B = −47, 600(A/P, 20%, 5) − 1, 720 + 32, 361(A/F , 20%, 5) = −13, 288. Select A. SEEM5740/ECLT5930 35 Equal useful lives (study period = useful life ) Investment alternatives PW (FW, AW): Choose the one with largest positive PW (FW, AW) or IRR: use the incremental procedure. In step 2, choose the first acceptable alternative in the list as the current best SEEM5740/ECLT5930 Cost alternatives PW (FW, AW): Choose the one with with least negative PW (FW, AW) or IRR: use the incremental procedure. In step 2, choose the first alternative in the list as the current best 36 Unequal useful lives Repeatability 1. 1. Study period = LCM of useful lives or assumed to be infinite 2. PW and IRR analysis can be applied to the whole study period. The most convenient approach is to use AW. For investment alternatives, choose the one with the largest positive AW. For cost alternatives, choose the one with the least negative AW. SEEM5740/ECLT5930 Cotermination 1. Compare over the whole study period (PW, FW, AW, IRR). 2. For a given alternative, its useful life may be shorter or longer than the study period. 3. Useful life < study period: for investment alternatives, reinvest the cash flows; for cost alternatives, lease the equipment until the end of study period. 4. Useful life > study period: estimate t...
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