Three alternatives are being considered for improving a street intersection.The annual dollar savings on account of the improvement is shown below. Assume that the intersection will last for 25 years and the interest rate is 5%. Each of the three improvements is mutually exclusive but provides similar benefits. The alternative that is the most economical is:
Alternative Total cost Annual Benefit
A $10,000 $ 800
B $12,000 1,000
C $19,000 1,400
Solution:
Estimate the Net Present Worth (NPW) for each alternative and identify the most economical alternative for construction.
Net Present Worth (NPW) = PW of benefits - PW of costs
Use the present worth factor for uniform series:
(P/A, i =5%, 25 yrs) = 14.094 (from the Factor Tables)
NPW(A) = ($800 x 14.094) - $10,000 = $1,275.20
NPW(B) = ($1000 x 14.094) - $12,000 = $2,094.00
NPW(C) = ($1400 x 14.094) - $19,000 = $731.60
Therefore, select Alternate B because it has the highest net present worth.