Midterm 2 Annual Worth

Use the following table to answer the questions

A B C D
Asset Life 2 3 4 6
PW (10%) 1.51 .96 .15 1.64
AW (10%) .61 .55 .05 .38
IRR 22% 12% 11% 16%

1) Given a choice of the four investments and no requirements to provide a service for a specific amount of time, which asset would choose?

A) A
B) B
C) C
D) D
E) Can't tell from the data

Answer: Since we have no obligation to a particular amount of time, we can ignore the lives of each of the assets. We do not need to look at the IRR, either. Since the lives of the assets do not matter, following the criteria, we would chose the asset with the highest present worth, which is 1.64, or asset D.

2) Suppose you are required to provide 12 years of service with the style of asset you choose. Which style of asset would you choose?

A) A
B) B
C) C
D) D
E) Can't tell from this data

Answer: This problem is the exact opposite of the one before. Again, since we are assuming we will be involved for 12 years no matter which asset we choose, we can ignore the life of the assets. Since the life of the assets are all equal, following annual worth criteria, we would chose the asset with the greatest annual worth, which is asset A, with AW of .61.

page revision: 1, last edited: 10 Mar 2009 18:30