Q1.When comparing mutually exclusive alternatives that have different lives by the present
worth method, it is necessary to
Sol: Find the least common denominator and convert both periods to equal length
Q2.To get the AW of a cash flow of $10,000 that occurs every 10 years forever, with the first
one occurring now, it is correct to
Sol: multiply the $10,000 by (A/P, i, 10).
Q3.Three mutually exclusive machines (A, B, and C) were under consideration to replace an
existing machine that is at the end of its service life. Annual worth for each machine was
computed based on its purchase price and expected future operating and maintenance
costs. The AW values of the three cost alternatives are $−23,000 for Alternative A, $−21,600
for B, and $−27,300 for C. On the basis of these results, the best decision is to
Sol: select alternative B.
Q4.The present worth of an alternative that provides infinite service is called its
Sol: capitalized cost
Q5.The capitalized cost of an initial investment of $200,000 and annual investments of $30,000
forever at an interest rate of 10% per year is closest to
Sol: $500,000
Q6.The estimates for two alternatives (shown in the table below) are to be compared on the
basis of their perpetual equivalent annual worth. At an interest rate of 10% per year, the
equation that represents the perpetual AW of alternative Y is
Sol: AWY = −90,000(A/P, 10%, 6) − 4000 + 15,000(A/F, 10%, 6).
Q7.Data, which included expected first cost, future revenues, future operating cost, and the
salvage value, was compiled for four independent alternatives. The computed present worth
for each project is listed in the table below. Which alternative(s) should be selected?
Sol: None of them
Q8.If you have the annual worth of an alternative with a 5-year life, you can calculate its
perpetual annual worth by
Sol: no calculation needed. The perpetual annual worth is equal to the annual worth.
Q9.An automaton asset with a high first cost of $10 million has required capital recovery (CR)
of $1,985,000 per year. The correct interpretation of this CR value is that
Sol: each year of its expected life, a net revenue of $1,985,000 must be realized to recover the
$10 million first cost and the required rate of return on this investment.
Q10.A full life-cycle cost analysis, using the annual worth method, would be most appropriate
when
Sol: a large proportion of all of the costs comes from annual operating and maintenance costs
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