The table below lists four mutually exclusive projects.Which project runs at the highest equivalent annual net cost?Assume an 8% discount rate? Total Operating Cost (PV) Project life (years)Project A 40000 8Project B 37500 7Project C 38500 6Project D 35500 5
Question
The table below lists four mutually exclusive projects.Which project runs at the highest equivalent annual net cost?Assume an 8% discount rate? Total Operating Cost (PV) Project life (years)Project A 40000 8Project B 37500 7Project C 38500 6Project D 35500 5
Solution
To find the project with the highest equivalent annual net cost, we need to calculate the equivalent annual cost (EAC) for each project. The EAC is the annual cost of owning, operating, and maintaining the project for its entire lifespan. It is calculated by dividing the present value of the project's total operating cost by the present value annuity factor for the project's lifespan at the given discount rate.
The formula for the present value annuity factor is:
PVA = [1 - (1 + r)^-n] / r
where r is the discount rate and n is the number of periods (in this case, years).
Let's calculate the EAC for each project:
-
Project A: PVA = [1 - (1 + 0.08)^-8] / 0.08 = 6.71008 EAC = 40000 / 6.71008 = $5961.35
-
Project B: PVA = [1 - (1 + 0.08)^-7] / 0.08 = 6.24689 EAC = 37500 / 6.24689 = $6000.96
-
Project C: PVA = [1 - (1 + 0.08)^-6] / 0.08 = 5.74664 EAC = 38500 / 5.74664 = $6699.57
-
Project D: PVA = [1 - (1 + 0.08)^-5] / 0.08 = 5.20637 EAC = 35500 / 5.20637 = $6816.91
So, Project D runs at the highest equivalent annual net cost.
Similar Questions
Complete this question in ExcelSocial Cost(in millions)Social Benefit(in millions)Net Social Benefit(in millions)Project A 1 10Project B 10 30Project C 4 8Project D 10 8Project E 7 21a) Using the information in the above table, calculate the net social benefit.b) If the projects are mutually exclusive, which project should be selected. Justify youranswer.c) If the projects are not mutually exclusive, which project(s) should be selected. Justifyyour answer.
If the projects in Table 1 are mutually exclusive and the required rate of return is 10%, which of the projects is chosen by NPV?Project AProject BProject B and Project CProject A and Project BProject C
Suppose a project has an initial investment cost of $40,000 with an annual operating profit of $8,500 profit for six years, what is the amount of equivalent annual net benefit of this project assuming a 6% discount rate?
sing the table below to identify the switching point of two mutually exclusive projects. Assume the discount rate is 10%.Project/ Year0123Project A-1000475475475Project B-500256256256Selected Answer: [None Given]Answers: 10.00%24.96% 15.00%20.04%
What is the NPV of a 6-year project that costs $100,000, has annual revenues of $50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 21%, and the discount rate is 14%.Question 4
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.