Solved problem on present worth method - 3
Solved problem on present worth method - 3
Investment
proposals X and Y have the net cash flows as follows:
Proposal
|
End of years
|
||||
0
|
1
|
2
|
3
|
4
|
|
X
(Rs.)
|
-
10,000
|
3,000
|
4,000
|
5,000
|
6,000
|
Y
(Rs.)
|
-5,000
|
2,000
|
2,000
|
1,500
|
1,500
|
Compare
the present worth of two alternatives at i = 12%. Which proposal should be
selected?
Given data
Method
= Present worth method - revenue dominated cash flow
i
= 12%
Proposal X
P
= Rs. 10,000
R1
= Rs. 3,000
R2
= Rs. 4,000
R3
= Rs. 5,000
R4
= Rs. 6,000
S
= Rs.0
Proposal Y
P
= Rs. 5,000
R1
= Rs. 2,000
R2
= Rs. 2,000
R3
= Rs. 1,500
R4
= Rs. 1,500
S
= Rs.0
Formula used
PW(i)
= - P + R1 (P/F, i, 1) + R2 (P/F, i, 2) + R3 (P/F, i, 3) + R4 (P/F, i, 4) + S
(P/F, i, 4)
Solution
Proposal X
PW(12%)1 = - 10,000 + 3,000 (P/F, 12%, 1) + 4,000
(P/F, 12%, 2)
+ 5,000 (P/F, 12%, 3)
+ 6,000 (P/F, 12%, 4) + 0 (P/F, 12%, 4)
= - 10,000 + 3,000 (0.8929) +
4,000 (0.7972) + 5,000 (0.7118) + 6,000 (0.6355)
= - 10,000 + 2678.70 + 3188.80 +
3,559 + 3,813
PW(12%)1 = Rs. 3,239.50
Proposal Y
PW(12%)2 = - 5,000 + 2,000(P/F, 12%, 1) + 2,000
(P/F, 12%, 2)
+ 1,500 (P/F, 12%, 3)
+ 1,500 (P/F, 12%, 4) + 0 (P/F, 12%, 4)
= - 5,000 + 2,000 (0.8929) +
2,000 (0.7972) + 1,500 (0.7118) + 1,500 (0.6355)
= - 5,000 + 1,785.80 + 1,594.40 +
1067.70 + 953.25
PW(12%)2 = Rs. 401.15
Result
In present worth
method revenue dominated cash flow, the alternative which has maximum present
worth amount is the best alternative. Therefore the proposal X is selected.
