Two business alternatives (shown in Table below) are competing with one another.

Question

Two business alternatives (shown in Table below) are competing with one another. The first Alternative A is a tour year project, while the second Alternative B is an eight year project. Interest rate is 10% How must this be solved Solve each PW independently at their individual time frames and compare Solve each PW at the LCM and compare Solve each AW independently at their individual time frames and compare Both i and iii Both ii and iii Trick Question - this can't be solved Solve and show which Alternative is the desirable Alternative (using any method/tool you deem appropriate and correct)

Explanation / Answer

a. since the projects had uneven life periods so they have to solved by using present worth analysis and least common multiple method i.e. repititive method.

b.

Evaluation of project under PW and LCM method.,

since alternative A has life of four years and B has life of 8 years so Alternate A has to be repeted again once to get 8 years life.,

Since Alternative A has more NPV it has to be selected.

Year PVF@10% Alternative A - cashflows Discounted cashflows Alternative - B - Cashflows Discounted cashflows 0 1 350,000 - 350,000 500,000 - 500,000 1 0.9091 190,000 - 64,500 = 125,500 114,092.05 250,000 - 138,300 = 111,700 101,546.47 2 0.8264 125,500 103,713.2 111,700 92,308.88 3 0.7563 125,500 94,915.65 111,700 84,478.71 4 0.6830 125,500 - 350,000 = - 174,500 - 119,183.5 111,700 76,291.1 5 0.6209 125,500 77,922.95 111,700 69,354.53 6 0.5645 125,500 70,844.75 111,700 63,054.65 7 0.5132 125,500 64,406.6 111,700 57,324.44 8 0.4665 125,500+0 = 125,500 58,545.75 111,700 52,108.05 NPV 115,257.45 $96,466.83

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