Using Rate of Return Analysis, determine the most economical alternative below.
ID: 1092011 • Letter: U
Question
Using Rate of Return Analysis, determine the most economical alternative below. Assume a minimum attractive rate of return of 6%, and a 5-year life with no salvage value for each. The alternatives are mutually exclusive.
Data
Alternatives
A
B
C
D
Initial Cost
$400,000
$100,000
$500,000
$200,000
Annual Costs
$900
$12,000
$23,000
$9,000
Annual Benefits
$101,800
$39,700
$148,200
$55,200
Alt. B
Alt. D
Alt. C
Alt. A
Data
Alternatives
A
B
C
D
Initial Cost
$400,000
$100,000
$500,000
$200,000
Annual Costs
$900
$12,000
$23,000
$9,000
Annual Benefits
$101,800
$39,700
$148,200
$55,200
Explanation / Answer
A
Initial cost= Annual income*(1-1/(1+r)^t)/r
400000= 100900*(1-1/(1+r)^5)/r
r= 8.27%
B
100000= 27,700*(1-1/(1+r)^5)/r
r= 11.94%
C
500000= 125,200*(1-1/(1+r)^5)/r
r= 7.99%
D
200000= 46,200*(1-1/(1+r)^5)/r
r= 5%
B has the highest Rate of Return
Alt. B
Initial Cost Annual Benefits Annual Costs Annual incmoe $400,000 $101,800 $900 $100,900 $100,000 $39,700 $12,000 $27,700 $500,000 $148,200 $23,000 $125,200 $200,000 $55,200 $9,000 $46,200Related Questions
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