10 Questions
When evaluating different-life alternatives, what are the assumptions of the LCM approach?
Service provided is needed over the LCM or more years, and cash flow estimates are the same for each life cycle
In the context of evaluating different-life alternatives, what is the purpose of using a study period?
To specify a time frame for ignoring all cash flows after this time
What is the purpose of using present worth analysis with a specified study period?
To select the alternative with the highest present worth value
What should be disregarded in present worth evaluation when using a study period?
All estimates after the study period
When comparing machines using present worth analysis at a specified interest rate, which factor determines whether to repurchase a machine after a certain number of years?
Salvage value
When formulating alternatives, what is the difference between mutually exclusive and independent projects?
Mutually exclusive projects compete against each other, while independent projects compete only against the Do Nothing alternative
In cash flow estimates, what is the main difference between Revenue and Cost alternatives?
Revenue alternatives include estimates of costs and revenues, while Cost alternatives include only costs and assume equal revenues and savings for all options
What does PW Analysis of Alternatives involve?
Converting all cash flows to present worth (PW) using the Minimum Acceptable Rate of Return (MARR)
In the evaluation of alternatives using PW, what does a PW of 0 indicate for one project?
It is justified
For mutually exclusive alternatives, how should the selection be made based on PW analysis?
Select one with numerically largest PW
Test your understanding of present worth analysis learning outcomes from Chapter 5, including formulating alternatives, present worth of equal-life and different-life alternatives, future worth analysis, and capitalized cost analysis.
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