Given two alternatives for energy-saving system: Data ... Alternative A ....Alte

Question

Given two alternatives for energy-saving system:

Data ... Alternative A ....Alternative B   

Initial cost ... $10,000 ... $9,000

Annual Benefits ... $5,200 ... $4,700

Annual Expenses ... $3,000 ... $2,000

Salvage Value ... $1,200 ... $1,300

Useful Life ... 6 years.... 4 years

Assuming that alternatives are replaced at the end of their useful lives (like-for-like replacement), determine the better alternative at an interest rate of 8%/year compounded annually using the Net Present Value decision criterion (Hint: You do not need to conduct an incremental analysis in this question. Evaluate the alternatives only based on NPV).

Explanation / Answer

All Amounts in $ Net Income for Alternative A 2200 $ Net Income for Alternative B 2700 $ Given the information above, the Net Present Values for each of the alternatives are worked out as below : Alternative A $ 806.04 Alternative B $ 766.20 Since Alternative A has a higher positive NPV than Alternative B, hence that is considered as the better alternative.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

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