Problem Group B The n values of each alternative differ. A subscription to a pro

Question

Problem Group B The n values of each alternative differ. A subscription to a professional magazine is available at three different rates: 1 yr $100 2 yr $175 3 yr $ 250 Assume you intend to subscribe probably for the rest of your professional career. Find the before-tax incremental rate of return on: (a) The two-year subscription compared to the one-year. (.Ans. 33.3%) (b) The three-year subscription compared to the one-year. (Ans. 21.5%) (c) If you can invest your money elsewhere at 20 percent, before taxes, which alternative is the better selection? (Ans. Select the two-year subscription.)

Explanation / Answer

a)

Let Incremental rate of return = r

75 = 100/(1+r)

r = 33.33%

b

Let Incremental rate of return = r

150 = 100/(1+r) + 100/(1+r)^2

r= 21.5%

3. For this analysis has to be mad for 6 years

According to net present value, 2 year subscription must be chosen as it has lowest presnet cost

Year 1 year 2 year Incremental 0 -100 -175 -75 1 -100 0 100 2 0 0 0 Incremental rate of return 33.33%

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