Two mutually exclusive projects with the same service lives of 2 years are characterized by first costs of $100 million and $120 million respectively and annual savings of $60 million and $70 million respectively. If the MARR is 10%, which one should be chosen on the basis of the present worth comparison method?
A)The second one because it has higher annual savings.
B)The first one because its present worth is higher.
C)The second one because its present worth is higher.
D)The first one because incremental present worth is positive.
E)Neither because both produce negative present worth.

Question

Quizplus · Accepted Answer

The present worth (PW) of each project is calculated using the formula PW = -C + (S/A, i%, n), where C is the initial cost, S is the annual savings, A is the annuity factor (A = (1 - (1 + i)^-n) / i), i is the interest rate (MARR), and n is the number of years. For the first project, PW = -$100M + ($60M/A, 10%, 2) and for the second project, PW = -$120M + ($70M/A, 10%, 2). Calculating these values shows that the first project has a higher present worth, making it the preferable choice.

Two Mutually Exclusive Projects with the Same Service Lives of 2