Use Present Worth Analysis to determine whether Alternative A or B should be cho

Question

Use Present Worth Analysis to determine whether Alternative A or B should be chosen. Items are identically replaced at the end of their useful lives. Assume an interest rate of 4% per year, compounded annually.

430

A) Alternative B, because it only incurs the initial cost once every three years instead of every two years

B)Alternative B, because it costs $491.68 more than Alternative A, in terms of present worth

C)

D) Alternative A, becasue it costs 491.68 less than Alternative B, In terms of Present Worth

A B Initial Cost

430

1135 Annual Benefit 100 200 Salvage Value 116 138 Useful Life (yrs) 2 3

Explanation / Answer

Present worth of Alternative A = 100 x 1.8861 + 116 x 0.9246 - 430 = $ ( 134.14)

Present worth of Alternative B = 200 x 2.7751 + 138 x 0.8890 - 1,135 = $ (457.30)

Do not understand where $ 491.68 is coming from

The correct answer should be D.

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