Two mutually exclusive alternatives are being considered. Year A B 0 -2500 -6000

Question

Two mutually exclusive alternatives are being considered. Year A B 0 -2500 -6000 1 +746 +1664 2 +746 +1664 3 +746 +1664 4 +746 +1664 5 +746 +1664 Page 1 of 2 Two mutually exclusive alternatives are being considered. Year A B 0 -2500 -6000 1 +746 +1664 2 +746 +1664 3 +746 +1664 4 +746 +1664 5 +746 +1664 Page 1 of 2 If the minimum attractive rate of return is 8%, which alternative should be selected? Solve the problem by Present worth analysis Annual cash flow analysis Rate of return analysis

Explanation / Answer

pv of all =746*(1/1.08+1/1.08^2+1/1.08^3+1/1.08^^4+1/1.08^5) =2978.56 2978.56-2500 =478.56. for second project pv=1664*((1/1.08+1/1.08^2+1/1.08^3+1/1.08^^4+1/1.08^5)) =6643.87 hence nect cash flow =6643.87-6000 =643.87 hence by present worth analysis 2nd project should be taken as 643.87>478.56 ........ as 2500-746 3.35 and from 1 and 2 we can say that rate of return for project 1 is greater than that rate of return of project 2.. hence project 1 is prefered

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