Three mutually exclusive alternatives are being considered. A B C First Cost $1,

ID: 1177189 • Letter: T

Question

Three mutually exclusive alternatives are being considered.

A B C

First Cost $1,000 $2,000 $3,000

Annual benefit 150 150 0

salvage value 1000 2700 5600

useful life,years 5 6 7

when each project reached the end of its life it would be sold for its salvage value and there would be no replacement.

A) construct a choice table for interest rates from 0%to 100%

B) if 8% is desired rate of return which project should be selected?

1. for project A

total benefit after 5 years 150 *5 = 750 in 5 years

% return per year = 150 *100/1000 =15%

for project B

total profit = 150*6 =900

salvage value benefit = 700 ;

total= 1600 in 6 years ;

% return per year = 1600*100/(6*2000) =13.33%;

for project C

benefit after 7 years = 2600;

% return per year = 2600*100/7*3000 = 12.3 %;

2. for desired 8% rate

project A has the highets rate of return so PROJECT A should be selected

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