Given the data below for two mutually exclusive alternatives, find the better al
ID: 1173024 • Letter: G
Question
Given the data below for two mutually exclusive alternatives, find the better alternative, if MARR is 8%.
Alt A
Alt B
Initial Cost
$10,000
$5,000
Maintenance Costs/year
$1,000
$500
Uniform Annual benefit
$3,000
$1,500
Salvage Value
$1,000
$2,000
Life Years
8
4
Alt A
Alt B
Initial Cost
$10,000
$5,000
Maintenance Costs/year
$1,000
$500
Uniform Annual benefit
$3,000
$1,500
Salvage Value
$1,000
$2,000
Life Years
8
4
Explanation / Answer
Hi,
Please find the answer as follows:
You can calculate NPV to make the decision
Alternative A
Initial Cost = -10000
Annual Cash Inflow = 3000 - 1000 = 2000
NPV = -10000 + 2000/(1+.08)^1 + 2000/(1+.08)^2 + 2000/(1+.08)^3 + 2000/(1+.08)^4 + 2000/(1+.08)^5 + 2000/(1+.08)^6 + 2000/(1+.08)^7 + 2000/(1+.08)^8 + 1000/(1+.08)^8 = 2033.547 or 2033.55
Alternative B
Initial Cost = -5000
Annual Cash Inflow = 1500 - 500 = 1000
NPV = -5000 + 1000/(1+.08)^1 + 1000/(1+.08)^2 + 1000/(1+.08)^3 + 1000/(1+.08)^4 + 2000/(1+.08)^4 = -217.83
Alternative A should be chosen as it offers a + NPV.
Thanks.
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