Using Rate of Return Analysis, determine the most economical alternative below.

Question

Using Rate of Return Analysis, determine the most economical alternative below.   Assume a minimum attractive rate of return of 6%, and a 5-year life with no salvage value for each.   The alternatives are mutually exclusive.

Data

Alternatives

A

B

C

D

Initial Cost

$400,000

$100,000

$500,000

$200,000

Annual Costs

$900

$12,000

$23,000

$9,000

Annual Benefits

$101,800

$39,700

$148,200

$55,200

Alt. D

Alt. A

Alt. B

Alt. C

Data

Alternatives

A

B

C

D

Initial Cost

$400,000

$100,000

$500,000

$200,000

Annual Costs

$900

$12,000

$23,000

$9,000

Annual Benefits

$101,800

$39,700

$148,200

$55,200

Explanation / Answer

For A

Cost = 400,0000

Annaul Cash Flow = 101,800 - 900 = 100,900

400,000 = 100,900*(P/A , r , 5)

r = 8.27 %

For B

Cost = 100,0000

Annaul Cash Flow = 39,700 - 12000 = 27,700

100,000 = 27,700*(P/A , r , 5)

r = 11.94 %

For C

Cost = 500,0000

Annaul Cash Flow = 148,200 - 23,000 = 125,200

500,000 = 125,200*(P/A , r , 5)

r = 7.99%

For D

Cost = 200,0000

Annaul Cash Flow = 55,200 - 9000 = 46,200

200,000 = 46,200*(P/A , r , 5)

r = 5 %

Since for B Internal rate is highest so Choose B

ans is

Alt. B

C.

Alt. B

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