6.

Applying the repeatability assumption, the alternative A will be repeated three times while the
alternative B will be repeated twice.
EOY A B Increment
(B-A)
0 -3500 -5000 -1500
1-3 1255 1480 225
4 -3500+1255=-2245 1480 3725
5 1255 1480 225
6 1255 -5000+1480=-3520 -4775
7 1255 1480 225
8 -3500+1255=-2245 1480 3725
9-12 1255 1480 225
PW = -1,500 + 225(P/A, i’%, 12) + 3,500[(P/F, i’%, 4) + (P/F, i’%, 8)] – 5,000(P/F, i’%, 6)
Use Linear Interpolation
+Find 2 point of i’ (one has the positive PW, one has the negative PW)
By examination:

We find
With i=25%, PW= $48.3
With i=30%, PW= -$163.6
+ Linear interpolation formula:
(i’/(0.25-0.3)=(48.3-0)/(48.3- (-163.6)) => i’=0.26
 Present Worth Method, MARR = 10% per year
PWD1 (10%) = −$600,000 − $780,000(P/A,10%,8) = −$4,761,222
PWD2 (10%) = −$760,000 − $728,000(P/A,10%,8) = −$4,643,807
PWD3 (10%) = −$1,240,000 − $630,000(P/A,10%,8) = −$4,600,987
PWD4 (10%) = −$1,600,000 − $574,000(P/A,10%,8) = −$4,662,233
 Select Design D3 to minimize the present worth of costs.
 Future Worth Method, MARR = 10% per year
FWD1 (10%) = −$600,000(F/P,10%,8) − $780,000(F/A,10%,8) = −$10,206,162
FWD2 (10%) = −$760,000(F/P,10%,8) − $728,000(F/A,10%,8) = −$9,954,471
FWD3 (10%) = −$1,240,000(F/P,10%,8) − $630,000(F/A,10%,8) = −$9,862,681
FWD4 (10%) = −$1,600,000 (F/P,10%,8) – $574,000(F/A,10%,8) = −$9,993,967
 Select Design D3 to minimize the future worth of costs.
 Annual Worth Method, MARR = 1% per year
AWD1 (10%) = −$600,000 (A/P,10%,8) – $780,000 = −$892,440
AWD2 (10%) = −$760,000 (A/P,10%,8) – $728,000 = −$870,424
AWD3 (10%) = −$1,240,000 (A/P,10%,8) – $630,000 = −$862,376
AWD4 (10%) = −$1,600,000 (A/P,10%,8) – $574,000 = −$873,840
 Select Design D3 to minimize the annual worth of costs.
 6.4

A W A (20 %)=−$ 30,000( A /P , 20 % ,10)+15,000( $ 3.50−$ 1.00)−$ 15,000+ $ 0( A / F ,20 % , 10)=$

A W B (20 %)=−$ 60,000( A / P ,20 % ,10)+20,000($ 4.40−$ 1.40)−$ 30,000+$ 20,000( A / F , 20 % , 10)=$
A W C (20 % )=−$ 50,000( A/ P , 20 % , 10)+18,000 ($ 4.10−$ 1.15)−$ 26,000+ $ 15,000( A/ F ,20 % ,10)=$

6-19

a/
NPV (X) = -$100000+[$50000(P/F,15%,1)]+ [$51,000(P/F,15%,2)] +[ $60,000(P/F,15%,3)]
= -$100000+[$50000*(0.8696)]+ [$51,000*(0.7561)] +[ $60,000*(0.6575)]
= -$100,000 + $43,480 + $38,561 + $39,450 = $21491
NPV of alternative Y = -$100,000 + [$205,760*(P/F,15%, 3)]
= - $100,000+[$205,760*0.6575) = $35287.2
=> Recommend Alternative Y
b/
IRR on the incremental cash flow (−$50,000 in year one, −$51,000 in year two, and $205760 -
$60000 = $145,760 in year 3) is 27.19%. This favors Y when the MARR is 15%.

c/
NPV of alternative X = -$100,000 + [$50,000*(P/F,27.5%,1)] + [$51,000*(P/F,27.5%,2)] +
[$60,000*(P/F, 27.5%,3)] = -$100,000 + $39,216 + $31,373 + $28,948 = -$463
NPV of alternative Y = -$100,000 + [$205,760*(P/F, 27.5%, 3)] = -$727
Choose X if one alternative must be selected.

d/
Alternative X ⇒ 1 year + ($50,000 / $51,000) = 1.98 years
Alternative Y ⇒ 2 years + ($100,000 / $205,760) = 2.49 years
The simple payback period for Alt. X is 2 years; for Alt. Y it is 3 years.

e/
Based on the answer to parts (a) and (b), Alternative Y should be recommended because its NPV is
much higher when MARR = 15%, and when MARR increased to 27.5%, the difference between both

6.28

a. Repeatability assumption
Based on the repeatability assumption, the study life would be 36 years, in which the investment
of Lead Acid repeats three times while that of Lithium Ion repeats twice.
 Applying the present worth method, we can get
𝑃𝑊acid = −$ 6,000(1 + (𝑃/𝐹, 5%, 12) + (𝑃/𝐹, 5%, 24)) − $ 2,500 (𝑃/𝐴, 5%, 36) = −$ 52,568.561
𝑃𝑊ion = −$ 14,000(1 + (𝑃/𝐹, 5%, 18)) − $ 2,400 (𝑃/𝐴, 5%, 36) + $ 2,800((𝑃/ 𝐹, 5%, 18) + (𝑃/𝐹,
5%, 36)) = −$ 57,882.835
We should select Lead Acid.

Another way:
AWAcid = -6,000(A/P, 5%, 12) – 2,500 = -6,000 × 0.1128 – 2,500 = - $3,176.8
AWIon = -14,000(A/P, 5%, 18) -2,400 + 2,800(A/F, 5%, 18)
= -14,000 × 0.0855 -2,400 + 2,800 × 0.0355 = - $3,497.6
We should select Lead Acid.
b.
PWAcid = - 6,000 -2,500(P/A, 5%, 12) - 8,000(P/A, 5%, 6).(P/F, 5%, 12)
= - 6,000 -2,500 × 8.863 - 8,000 × 5.076 × 0.5568 = - $50,768
PWIon = - 14,000 – 2,400(P/A, 5%, 18) + 2,800(P/F, 5%, 18)
= - 14,000 – 2,400 × 11.69 + 2,800 × 0.4155 = - $40,892.6
We should select Lithium Ion

a. Assume repeatability so that AWs can be directly compared (over a 6−year study period).
60 hp
 AWA (8%) = −$1,200(A/P,8%,3) − $160 − (0.746 kW/hp)(800 hrs/yr.)($0.07/kWh) = −
0.92
$3,350.12
 60 hp
 AWB(8%) = −$1,000(A/P,8%,6) − $100 − ( (0.746 kW/hp)(800 hrs/yr.)($0.07/kWh) = −
0.8
$3,449.5
 Select Motor A

(b) Increased capital investment of Motor A (relative to Motor B) is being traded off for improved
electrical efficiency and lower annual energy expenses.
6.32

a) PW method :
Cash flow for IRR & ERR:
→ Alternative B gives a lower cost (smaller absolute value of PW), therefore it
EOY ∆ (B− A) should be preferred by Rule 2 (Sec. 6.2.2)
0 $ (74,000)
b) IRR method :
1 $ 9,500
- First, we need to rank the two alternatives in order of increasing capital
2 $ 9,500 investment, thus evaluating the incremental cash flow ∆ (B− A):
3 $ 9,500 −Next , we calculate the IRR by letting the PW ∆ (B −A ) (i ' % )=0.
4 $ 9,500
Using trial∧error , we found out that :22 %<i ' %<23 % .
5 $ 9,500 → The alternative B is preferred since the increment is justified and IRR exceeds
6 $ (15,500) MARR.
7 $ 75,500
8 $ 75,500 c) ERR method :ϵ =15 %
- First, we need to find the PW of all cash outflows and the FW of all cash inflows:
9 $ 115,500
PW outflows =$ 74,000+ $ 15,500∗ ( FP , ϵ , 6)=$ 80,701.078
6-34

a/
 PW1(8%) = −$100,000 − $80,000(P/F, 8%, 5) + $20,000(P/F, 8%, 10) +
($50,000- $22,000)(P/A, 8%, 10) = $42,699
 PW2(8%) = −$150,000 + ($70,000 - $40,000)(P/A, 8%, 10) = $51,303
Therefore, select alternative 2 to maximize profitability.

b/

 PW(1) = -$100,000 - $80,000 (P/F,15%,5) + $20,000 (P/F,15%,10) + $28,000 (P/A,15%,10)

= -$100,000 - $39,774.13882 + $4943.69412 + $140,525.52

= $5695.075

 PW(2) = -$150,000 + $30,000 (P/A,15%,10) = $563

If the MARR is changed to 15% per year, alternative 1 becomes the better choice. The principal
assumption in parts (a) and (b) is the repeatability of cash flows for alternative 1.
6.45

Based on the repeatability assumption, the study period is 20 years

a. E1: 4 cycles
PW1= -14000[1+ (P/F,15%,5) +(P/F,15%,10) +(P/F,15%,15)] - 14000(P/A,15%,20)+
8000[(P/F,15%,5)+ (P/F,15%,10)+ (P/F,15%,15) +(P/F,15%,20)]
= -$106,345
E2: 1cycle
PW2= -65000 -9000(P/A,15%,20) +13000(P/F,15%,20) = -$120,539

Thus, choosing equipment 1 to minimize cost

b. AW of E2 in the period 5 years:

PW5= [65000(A/P, 15%, 20) − $9,000(A/F, 15%, 20)] × (P/A, 15%, 15) = $59 991.9
PWmv= 13000(F/F,15%,15) = = $1,597.6
Market value is the year 5: MV5= PW5+PWmv= $61,589.5

AW= -65000(A/P,15%,5) -9000 + 61,589.5 (A/F,15%,5)

= -$19 355.7
Compare with:
The annual worth for investment in system E2 in part (a) is
𝐴𝑊𝐸2 = 𝑃𝑊𝐸2(𝐴/𝑃, 15%, 20) = −$ 19,257.597
Thus AW remains the same in 2 ways.