You're considering certain equipment upgrades in your lab and you want to perform a net present worth analysis of the projected cash flow streams from these upgrades to determine which option presents the best alternative.
You can use the same techniques discussed in Recipe 14.6 to discount the projected cash flow streams in terms of present values. The option with the highest net present value is the best choice.
Consider this example: you're currently running a numerical simulation laboratory that uses an aging supercomputer to run your simulations. You've forecast cash flows for your simulation services over the next five years. Now you're considering purchasing one of two candidate cluster-based systems that will boost your forecast cash flow over the next five years. These new clusters cost money, though, so you're not sure which one, if either, offers the best choice economically speaking. You need to decide whether to purchase system A, system B, or nothing at all.
Let's further assume that system A costs $250,000 and system B, which is somewhat more powerful than system A, costs $310,000. Also, at the end of the fifth year you can sell either system for salvage at 10% of its original cost.
You've worked out cash flow forecasts for these two options as shown in Figure 14-2.
No Upgrade option means you don't upgrade your system, but instead continue offering services over the next five years using your current system. ...