TFS · Practice Exam 2 · Problem 5PDFSolution in PDF ↓
TFS · Practice Exam 2 · Problem 5
Problem & Solution
Video Synthesis
- Problem: A power plant upgrade project takes two years to implement and has an initial cost of 500,000 plus an additional 250,000 at the end of year one and year two.
- Key values: 6 %, 000 in
- Reference: reference handbook, look up
- Result: You're going to get right back to the same present value we calculated before which is 948,770 and then once we get that we can turn that into the ann...
- ✅ Answer: A
Office Hours
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Student questions asked in live office hours about this problem
OH 81
Q: Why can't we annualize the middle cashflows directly using A/F factors for their respective years, rather than converting everything to present value first?
A: The A/F factor annualizes a future value only over the years from when it occurs to the end, not over the full project period. To annualize a cashflow over the entire 20 years, you must first convert it to present value using P/F, then annualize that present value using A/P over the full 20-year span.