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Two alternatives are shown in table
Two alternatives are shown in table. Choose the best alternative using interest rate of 10% per year (Hint: Use Present Worth Analysis) (40) Alternative M Alternative N First cost, 10000 Salvage Value, $5,000 Annual cost 1000 Life, years 10 8000 10000 3000 20
Expert Solution
Answer
Alternative M is best option with lower EAA ( Equivalent annual annuity)
Alternative M
NPV = -10000 + (-1000(P/A, 10%, 10yr)) + 5000(P/F, 10%, 10yr)
= -10000 - 6144.57 + 1927.71
= $ 14216.86
EAA =
(14216.86 × 0.10) ÷ ( 1 - (1.10) ^-10
= $ 2315.45
Alternative N
NPV = -8000 + (-3000(P/A, 10%, 20yr)) + 10000(P/F, 10%, 20yr)
= -8000 - 25540.69+ 1486.43
= $ 32054.26
EAA =
(32054.26× 0.10) ÷ ( 1 - (1.10) ^-20
= $ 3766.65
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