Engineering Economic Analysis

160 PRESENTWORTH ANALYSIS

AI(ernative C, Gas Station

NPW =-95,000 + 1O,500(P/A, 10%,20) +30,000(P/F,10%,20)

= -95,000 + 89,400 + 4460

= -$1140

AlternativeD,Small Motel

NPW= -350,000 +36,000(P/A,10%,20) +150,000(P/F,10%,20)

=-350,000 + 306,500+ 22,290

=-$21,210

The criterion is to maximize net present worth. In this situation, one alternative has NPW equal

to zero, and three alternatives have negative values for NPW. We will select the best of the.four

alternatives, namely, the do-nothing Alt.A,with NPW equal to zero.

A piece ofland may be purchased for $610,000 to be strip-mined for the underlying coal. Annual

net income will be $200,000 per year for 10 years. At the end of the 10 years, the surface of

the land will be restored as required by a federal law on strip mining. The reclamation will cost

$1.5 million more than the resale value of the land after it is restored. Using a 10% interest rate,

determine whether the project is desirable.

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;SQlUTION

The investment opportunity may be described by the following cash flow:

Year Cash Flow (thousands)

o -$610

1-10 +200 (per year)

10 -1500

NPW =-610 +200(P/A, 10%, 10) - 1500(P/F,10%, 10)

= -610 + 200(6.145) - 1500(0.3855)

=-610 + 1229 - 578

=+$41

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Since NPW is positive, the project is desirable. (See Appendix 7A for a more complete analysis

of this type of problem. At interest rates of 4.07% and i8.29~the NPW= 0.)< I!;!:I

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