Decision D6, which has three possible choices (X, Y, or Z), must be made in year 3 of a 6-year study period in order to maximize E(PW). Using a MARR of 15% per year, the investment required in year 3, and the estimated cash flows for years 4 through 6, determine which decision should be made in year 3.
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Calculate the E(PW) in year 3 and select the largest expected value. In $1000 units,
E(PW of D6,X) = –200 + 0.7[50(P/A,15%,3)] + 0.3[40(P/F,15%,1)
+30(P/F,15%,2) + 20(P/F,15%,3)]
= –98.903 ($–98,903)
E(PW of D6,Y) = –75 + 0.45[30(P/A,15%,3) + 10(P/G,15%,3)]
+0.55[30(P/A,15%,3)]
= 2.816 ($2816)
E(PW of D6,Z) = –250 + 0.7[190(P/A,15%,3) – 20(P/G,15%,3)]
+ 0.3[–30(P/A,15%,3)]
= 4.120 ($4,120)
Select decision branch Z; it has the largest E(PW)
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