estion 4 ( A company is considering investing in one of the following alternativ
ID: 1221992 • Letter: E
Question
estion 4 ( A company is considering investing in one of the following alternative projects. Alternative Project Capital Investment | $1,000,000 $850,000 1,200,000 S900.000 Annual Benefits 2 30,000 200.000 225 ,000 Annual Expenses 82,000 80,000 90,000 For the four mutually exclusive alternatives,select best alternative using the annual worth assuming that revenues and other economic bene fits are not present. Assume that each project has a useful life of 20 years, and the M ARR is 10% per year. DSExplanation / Answer
Working note:
Since question states that other economic benefits are not present, we have to do the annual worth (AW) analysis only on the basis of costs.
Annual worth of costs (AW in $) for each project:
Project A: 1,000,000 x A/P(10%, 20)* + 82,000 = 1,000,000 x 0.12 + 82,000 = 120,000 + 82,000 = 202,000
Project B: 850,000 x A/P(10%, 20) + 80,000 = 850,000 x 0.12 + 80,000 = 102,000 + 80,000 = 182,000
Project C: 1,200,000 x A/P(10%, 20) + 90,000 = 1,200,000 x 0.12 + 90,000 = 144,000 + 90,000 = 234,000
Project D: 900,000 x A/P(10%, 20) + 84,000 = 900,000 x 0.12 + 84,000 = 108,000 + 84,000 = 192,000
Since project B has the lowest AW of costs, B should be chosen.
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