Two financial choices are available. We will compare them using the standard cri
ID: 2761024 • Letter: T
Question
Two financial choices are available. We will compare them using the standard criteria that the annual worth of one is greater than the annual worth than the other. The first choice has an initial investment of 40,000. It generates a yearly revenue of 18000 and at the end of three years has a salvage value of 6000. The second choice has an initial investment of 30,000. It generates a yearly revenue of 12000 and at the end of 6 years has a salvage value of 4000. The interest rate environment is 3%. The management wishes the time Horizon to be 24 years and assume exact repetition of the choice after each time period is completed Analyze the two choices using Annualized Worth.Explanation / Answer
Year
Particulars
Cash flow
Discount rate@3%
Present value
0
Initial investment
-40000
1
-40000.00
1
Revenue
18000
0.970874
17475.73
2
Revenue
18000
0.942596
16966.73
3
Revenue
18000
0.915142
16472.55
Salvage value
6000
0.915142
5490.85
Total (a)
16405.85
Cumulative discount factor from year 1 to 3 (b)
2.83
Annual worth (c) =(a)/(b)
5799.97
Year
Particulars
Cash flow
Discount rate@3%
Present value
0
Initial investment
-30000
1
-30000.00
1
Revenue
12000
0.970874
11650.49
2
Revenue
12000
0.942596
11311.15
3
Revenue
12000
0.915142
10981.70
4
Revenue
12000
0.888487
10661.84
5
Revenue
12000
0.862609
10351.31
6
Revenue
12000
0.837484
10049.81
Salvage value
4000
0.837484
3349.94
Total (a)
38356.23
Cumulative discount factor from year 1 to 6 (b)
5.42
Annual worth (c) =(a)/(b)
7080.46
Answer: As annual growth of option B is more than option A, the option B will be accepted.
Year
Particulars
Cash flow
Discount rate@3%
Present value
0
Initial investment
-40000
1
-40000.00
1
Revenue
18000
0.970874
17475.73
2
Revenue
18000
0.942596
16966.73
3
Revenue
18000
0.915142
16472.55
Salvage value
6000
0.915142
5490.85
Total (a)
16405.85
Cumulative discount factor from year 1 to 3 (b)
2.83
Annual worth (c) =(a)/(b)
5799.97
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.