A firm has two alternatives for improvement of its existing production line. The

Question

A firm has two alternatives for improvement of its existing production line. The data are as
follows. Determine the best alternative using an interest rate of 15% (cheapest alternative).
                                              Alternative A              Alternative B
Initial installment cost                     $1,500                $2,500
Annual operating cost                    $800                        $650
Service life                                            5 Years              8 Years
Salvage Value                                     0                             0
                                   a. Alternative A          b. Alternative B

Explanation / Answer

Alternative A, Initial Investment=1500, CF = 800, n=5, r=15%

NPV = 1500 + 800/1.15 + 800/1.15^2 + .... + 800/1.15^5 = $3,636.28

NPV = 2500 + 650/1.15 + 650/1.15^2 + .... + 650/1.15^5 = $4,710.23

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