Question

6-10. Today, you have $40,000 to invest. Two investment alternatives are available to you. One would require you to invest your $40,000 now; the other would require the $40,000 investment two years from now. In either case, the investments will end five years from now. The cash flows for each alternative are provided below. Using a MARR of 10%, what should you do with the $40,000 you have? Year Alternative 1 Alternative 2 0 -$40,000 $0 1 $10,000 $0 2 $10,000 -$40,000 3 $10,000 $16,500 4 $12,000 $16,500 5 $13,000 $16,500

	Alternative 1	Alternative 2

Answer 1

Answer:	Here alternative with maximum NPV would be selected. The NPV of both alternative would be calculated as follows:
Year	Alternative 1	Discount faxctor @ 10%	PV of cash flow		Alternative 2	PV of cash flow
0	$                                                     -40,000	1	$            -40,000	($-40000*1)	$                            -	$                                             -
1	$                                                       10,000	0.909	$               9,091	($10000*0.909)	$                            -	$                                             -
2	$                                                       10,000	0.826	$               8,264	($10000*0.826)	$                  -40,000	$                                   -33,058	($-40000*0.826)
3	$                                                       10,000	0.751	$               7,513	($10000*0.751)	$                   16,500	$                                     12,397	($16500*0.751))
4	$                                                       12,000	0.683	$               8,196	($12000*0.683)	$                   16,500	$                                     11,270	($16500*0.683))
5	$                                                       13,000	0.621	$               8,072	($13000*0.621)	$                   16,500	$                                     10,245	($16500*0.621))
	NPV		$               1,137	Sum of all above		$                                          854	Sum of all above
	Since alternative 1 has maximum NPV i.e. $1136, it would be selected