7. You have been asked to make a decision regarding two altematives. To make you

Question

7. You have been asked to make a decision regarding two altematives. To make your decision, use Benefit/Cost Analysis. One of the altematives (from TopClass, Inc.) has the characteristics shown in the chart below. The second alternative (from BEST, Corp.) has a 9-year life span. Fortunately, the EUAB and EUAC for BEST, Corp.'s alternative have already been calculated for you. It was found that EUAB $30,500 and EUAC- $24,550. Given this infomation, decide whichifany, of the two options should be chosen. MARR = 10%. Hint Do not orget about the proper treatment of the salvage value in your calculations (AB/AC-0.97) To ass, Inc Initial Cost $70,000 O&M; Costs S7,500 S25,000 in years 1 and 2, S35,000 in years 3 and 4, and S25,000 in years 5 and 6 Benefits Salva $10,000 Life (in years What is the simple (a.k.a., conventional) payback period for TopClass, Inc.? 3.27 years)

Explanation / Answer

EUAC for TopClass = 70000(A/P,10%,6)+7500=16072.5+7500=23572.5

EUAB for TopClass = 28293.32+10000(A/F,10%,6)=28293.32+1296.07=29589.39

EUAW=EUAB-EUAC=29589.4-23572.5=6016.9 for TopClass

EUAW=EUAB-EUAC=5950 for BEST

Hence TopClass should be chosen over BEST

Answer for other question

Basic Payback Period for TopClass will be the tenure in which Cost is covered with Benefits

So in "25000+25000+35000>70000" hence in 3rd year cost will be recovered

therefore payback period will be 3 years for TopClass

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