A sample Engineering Economy problem: Winter 2003

Consider two mutually exclusive alternatives, M and N,

with the following expected cash flow:
End of Period Alternative M Alternative N
(year) cash flow $ cash flow $
0 -100 -120
1 20 60
2 30 50
3 40 50
4 50 40
5 80 20
Assuming that interest rate is 10%. Find the
present worth of each alternative

Solution using Excel:

To find Net Present Value (NPV) use
Function Wizard >> Financial from Function Category >> NPV from Function Name
I= 10%
Alternative M Alternative N
NPV for period 1 to 5 $156.85 $173.17
cash flow period 0 -100 -120 (prepare manually)
final NPV $56.85 $53.17 Summary of sensitivity analysis:
Select M as has higher final NPV i% final NPV of M final NPV of N
8 67.19 61.13
Sensitivity analysis using Excel: 10 56.85 53.17
I= 8% 12 47.41 45.79
Alternative M Alternative N 14 38.78 38.92
NPV for period 1 to 5 $167.19 $181.13 16 30.87 32.53
cash flow period 0 -100 -120
final NPV $67.19 $61.13 Sensitivity graph:
Chart Wizard >> XY Scatter >> Next >> Finish
I= 12%
Alternative M Alternative N
Sensitivity analysis
NPV for period 1 to 5 $147.41 $165.79
cash flow period 0 -100 -120
80
final NPV $47.41 $45.79

70
I= 14%
Alternative M Alternative N
60
NPV for period 1 to 5 $138.78 $158.92
cash flow period 0 -100 -120
final NPV $38.78 $38.92 50

Column G
final NPV

I= 16% 40 Column H
Alternative M Alternative N
NPV for period 1 to 5 $130.87 $152.53 30
cash flow period 0 -100 -120
final NPV $30.87 $32.53 20

10

0
7 8 9 10 11 12 13 14 15 16 17

interest rate