Lives Differ

2: The Larkspur Furniture Company needs a new grinder. Below are mutually exclusive alternatives. Assume i = 3% per year. Larkspur uses a 10-year planning horizon. Assume identical replacement for alternative A.

Alternative A B

Initial Cost $4200 $5700

Annual Costs $250 $350

Salvage Value $100 $3000

Life 5 years 10 years

(a) What is the present worth of Alternative A? <4 pts>

Reasoning/Work:

(b) What is the present worth of Alternative B? <4 pts>

Reasoning/Work:

(c) Which alternative should be selected? <1 pt>

Reasoning/Work:

Perpetual Life

3: Enricos uncle set up a fund 25 years ago with a single deposit so that it would give an annual perpetual payment of $25,000 starting this year. If the interest was 8% back then, how much did his uncle deposit? <10 pts>

Reasoning/Work:

4: A levee is to be initially dredged for $30 million but needs to be dredged every 15 years at a cost of $30 million each time. The annual maintenance cost to shore up the embankments is $800,000 and money can be set aside at 5% interest. What is the amount of money that needs to be set aside so that the levee can be initially dredged, maintained, and dredged forever? <8 pts>

Reasoning/Work:

Multiple Alternatives

5: Consider the following three alternatives.

A B C

Cost $50 $30 $40

Net annual benet 15 6.5 6

Useful life, in years 5 10 10

At the end of the 5-year useful life of A, a replacement is not made. Use a10-year analysis period and 6% interest.

(a) What is the net present worth of Alternative A? <4 pts>

Reasoning/Work:

(b) What is the net present worth of Alternative B? <4 pts>

Reasoning/Work:

(c) What is the net present worth of Alternative C? <4 pts>

Reasoning/Work:

(d) Which alternative should be selected? <1 pt>

Reasoning/Work: