Use Present Worth Analysis to determine whether Alternative A or B should be cho

Question

Use Present Worth Analysis to determine whether Alternative A or B should be chosen. Items are identically replaced at the end of their useful lives. Assume an interest rate of 4% per year, compounded annually. Alternative B. because it only incurs the initial cost once every three years instead of every two years Alternative B. because it costs $313.84 more than Alternative A. in terms of present worth Alternative A. because it costs $313.84 less than Alternative B. in terms of present worth Alternative A. because its present worth is positive

Explanation / Answer

The correct answer: Alternative A, because it costs $ 313.84 less than Alternative B, in terms of present worth

Present worth of Alternative A = 60 x 1.8861+ 88 x 0.9246 - 240 = $ 113.166 + $ 81.36 - $ 240 = $ (45.47)

Present worth of Alternative B = 82 x 2.7751 + 157 x 0.8890 - 600 = $ ( 227.56 + 139.57 - 600) = $ (232.87)

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