Solved problem on future worth method - 2
Solved problem on future worth method - 2
A
man plans to build a shop in his new purchased plot. He has several
alternatives to obtain a desirable return on his investment. After much study
and calculation he found out two alternatives which are given in the following
table:
Information
|
Gas station
|
Ice cream shop
|
First
cost
|
₹.
25,00,000
|
₹.
35,00,000
|
Annual
income
|
₹.
8,50,000
|
₹.
9,50,000
|
Annual
property taxes
|
₹.
85,000
|
₹.
1,50,000
|
Life
of building
|
15
|
15
|
Evaluate the alternatives based on future
worth method at i = 12%, compounded annually and select the most suitable one.
Given data
Method
= Future worth method - revenue dominated cash flow
i
= 12%
Gas station
P
= ₹. 25,00,000
Final
annual income = R1 = R2 = … R15 = A = ₹.
8,50,000 – 85,000 = ₹.7,65,000
n
= 15 years
S
= ₹. 0
Ice cream shop
P
= ₹. 35,00,000
Final
annual income = R1 = R2 = … R15 = A = ₹.
9,50,000 – 1,50,000 = ₹.
8,00,000
n
= 15 years
S
= ₹. 0
Formula used
Here
revenue on all years is equal.
Therefore,
FW(i) = -P (F/P, i, n) + A (F/A, i, n) + S
Solution
Gas station
FW(12%)1 = - 25,00,000 (F/P, 12%, 15) + 7,65,000
(F/A, 12%, 15) + 0
= - 25,00,000 (5.474) + 15,00,000
(37.280)
= - 1,36,85,000 + 5,59,00,000
FW(12%)1 = ₹. 4,22,15,000
Ice cream shop
FW(12%)2 = - 35,00,000 (F/P, 12%, 15) + 8,00,000
(F/A, 12%, 15) + 0
= - 35,00,000 (5.474) + 8,00,000
(37.280)
= - 1,91,59,000 + 2,98,24,000
FW(12%)2 = ₹. 1,06,65,000
Result
In future worth
method revenue dominated cash flow, the alternative which has maximum future
worth amount is the best alternative. Therefore building the gas station is the
best alternative.