Four mutually exclusive alternatives are being considered for a system. These fo
ID: 1216421 • Letter: F
Question
Four mutually exclusive alternatives are being considered for a system. These four alternatives are expected to provide equivalent level of service over a 75 year period. The initial costs and net annual benefits are given below for the four alternatives.
A B C D
Initial cost $62,000 $52,000 $150,000 $55,000
Net Annual Benefits $10,000 $8,000 $20,000 $9,000
MARR is 10% per year. Using the Internal rate of return method, select the best alternative.
Explanation / Answer
Answer:
Given the information is:
MARR = 10%
Duration period is: 75
The net present value (NPW) of four alternatives are as follows:
Alternative A:
NPW = -62,000 + 10,000 (P/A, i, 10)
= -62,000 + 10,000(9.99)
= -62,000 + 99,900
= $37,900
Alternative B:
NPW = -52,000 + 8,000 (P/A, i, 10)
= -52,000 + 79920
= $27,920
Alternative C:
NPW = -150,000 + 20,000 (P/A, i, 10)
= -150,000 + 199800
= $49,800
Alternative D:
NPW = -55,000 + 9,000 (P/A, i, 10)
= -55,000 + 99,900
= $44,900
The four (A, B, C & D) alternatives’ net present values are $37,900; $27,920; $49,800 and $44,900 respectively. Therefore, we can choose C as the best alternative.
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