Three mutually exclusive alternatives A, B and C, are under consideration. All h

Question

Three mutually exclusive alternatives A, B and C, are under consideration. All have a life of five years. Alternative A needs an initial investment of $12,000 and provides a net revenue of S4000 per year for five years. Alternative B requires an investment of $18,000 and has an annual net revenue of $5000. Alternative C requires an investment of $26,000 and has an annual net revenue of $6,500. All estimates are in constant dollars. Inflation is expected to average 3.7% per year for the next five years, and the market MARR is 12% per year. Which alternative should be chosen?

Explanation / Answer

Solution:

Nominal Discount rate(NDR) = (1+ Real Discount rate)(1+Inflation rate) - 1

= (1+0.12)(1+0.037)-1

= 16.14%

PVAF@16.14%1-5 = 3.3636

Statement showing evaluation of proposals

Since Alternative A has higher NPV it is advice to undertake Alternative-A.

Particulars Alt-A Alt-B Alt-C Initial Cash Outflow - A $12000 $18000 $26000 P.V. on cash inflows - B $13454.40 $16818 $21863.40 NPV(B-A) $14544 ($1182) (4136.60)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.