Question

In: Economics

Evaluate the following mutually exclusive alternatives with a horizon of 25 years and a minimum acceptable...

Evaluate the following mutually exclusive alternatives with a horizon of 25 years and a minimum acceptable rate of return of 15 percent using the conventional benefit-cost ratio and net present worth analysis. Which project would you choose and why?

A

B

C

Initial Investment

9,500

18,500

22,000

Annual Savings

3,200

5,000

9,800

Annual Costs

1,000

2,750

5,400

Salvage Value

6,000

4,200

14,000

Solutions

Expert Solution

Net Benefit for project A=3200/1.15+3200/1.15^2+3200/1.15^3+...+3200/1.15^25+6000/1.15^25=20685.27+182.26=20867.53

Net Cost for Project A=9500+1000/1.15+1000/1.15^2+...+1000/1.15^25=9500+6464.15=15964.15

PW=20867.53-15964.15=4903.38

B/C =20867.53/15964.2=1.31

Simlalrly for B

Net Benefit for project B=5000/1.15+5000/1.15^2+5000/1.15^3+...+5000/1.15^25+4200/1.15^25=32320.74+127.58=32448.32

Net Cost for Project A=18500+2750/1.15+2750/1.15^2+...+2750/1.15^25=18500+17776=36276

PW=32448.32-36276=-3827.68

B/C =32448.32/36276=0.89

Simlalrly for c

Net Benefit for project B=9800/1.15+9800/1.15^2+9800/1.15^3+...+9800/1.15^25+14000/1.15^25=63348.7+425.3=63774

Net Cost for Project A=22000+5400/1.15+5400/1.15^2+...+5400/1.15^25=22000+34906=57106

PW=63774-57106=6878

B/C =63774/57106=1.12

B/C ratio is higher for project A but Net worth is highest for project C

Benefit Cost ratio is enough to be greater than 1 and In Project C we have highest net worth

Therefore we should choose project C


Related Solutions

Evaluate the following mutually exclusive alternatives with a horizon of 25 years and a minimum acceptable...
Evaluate the following mutually exclusive alternatives with a horizon of 25 years and a minimum acceptable rate of return of 15 percent using the conventional benefit-cost ratio and net present worth analysis. Which project would you choose and why? A B C Initial Investment 9,500 18,500 22,000 Annual Savings 3,200 5,000 9,800 Annual Costs 1,000 2,750 5,400 Salvage Value 6,000 4,200 14,000
A manufacturing company is considering two mutually exclusive alternatives. Alternatives                            &nb
A manufacturing company is considering two mutually exclusive alternatives. Alternatives                                    Alt. A         Alt. B Initial cost              $ 42,500    $ 70,000 Annual costs O & M                      $ 6,000       $ 4,000 Annual savings       $ 18,500   $ 20,000 Residual value         $ 12,000   $ 25,000 Shelf life                   3 years   6 years What would be the "advantage" in annual terms of Alternative B versus Alternative A at 15% interest? Select one: a. $ 3020 b. $ 3500 c. $ 7436 d. Alternative B does...
Consider 3 mutually exclusive alternatives, each with a 10-year useful life. If the Minimum Attractive Rate...
Consider 3 mutually exclusive alternatives, each with a 10-year useful life. If the Minimum Attractive Rate of Return (MARR) is 14.5%, which alternative should be selected? Solve the problem using benefit-cost ratio analysis. Alternative Choice #1 Choice #2 Choice #3 Cost 810 305 145 Uniform Annual Benefit 131 62 36
There are three mutually exclusive alternatives, as vendors to outsource a project, with the following cash...
There are three mutually exclusive alternatives, as vendors to outsource a project, with the following cash flow and useful life. Which of these three alternatives would you recommend to be selected? The MARR is 10% per year. Vendor 1 Vendor 2 Vendor 3 First Cost $60,000 $35,000 $25,000 Annual operating and maintenance cost $3,000 every 4 years $1,000 per year $2,000 in yr 1 and it increases by $200 every year thereafter Salvage value $10,000 $4,000 $3,000 Useful life, years...
It is desired to compare the after-tax economics of two mutually exclusive alternatives with the following...
It is desired to compare the after-tax economics of two mutually exclusive alternatives with the following before-tax data for a study period (planning horizon) of 4 years:    Semiautomatic Machine                   Automatic Machine First cost                                            $100,000                                       $150,000 Useful life                                              4 years                                             5 years Market value at end of useful life             $0                                                     $0 Annual before-tax cash disbursements $50,000                                            $15,000 Annual cash revenues                           $110,000                                          $90,000 MARR (after tax) = 15% p.a. Study Period = 4 years Both alternatives are to be depreciated...
Two mutually exclusive alternatives are bring considered: A and B. Both alternatives cost $1,200 at the...
Two mutually exclusive alternatives are bring considered: A and B. Both alternatives cost $1,200 at the present. However, the pattern of revenue from them is different. Alternative A has the potential to bring more revenues later in the project life. The expected revenues of alternative A are: $350, $500, and $850 by the ends of years one to three, respectively. Alternative B promises more immediate cash inflow which is expected to diminish with time: $750, $300, and $100 by the...
Two mutually exclusive alternatives are bring considered: A and B. Both alternatives cost $1,200 at the...
Two mutually exclusive alternatives are bring considered: A and B. Both alternatives cost $1,200 at the present. However, the pattern of revenue from them is different. Alternative A has the potential to bring more revenues later in the project life. The expected revenues of alternative A are: $350, $500, and $850 by the ends of years one to three, respectively. Alternative B promises more immediate cash inflow which is expected to diminish with time: $750, $300, and $100 by the...
The following two projects of equal risk are mutually exclusive alternatives for expanding the firm’s capacity....
The following two projects of equal risk are mutually exclusive alternatives for expanding the firm’s capacity. The firm’s cost of capital is 15%. The cash flows for each project are given in the following table. Year Project A Project B 0 210,000 20,000 1 15,000 12,000 2 30,000 10,500 3 32,000 9,500 4 425,000 8,200 Required: a) Calculate each project’s payback period. Using the payback period criterion which project is preferable? b) Calculate the net present value for each project....
The following two projects of equal risk are mutually exclusive alternatives for expanding the firm’s capacity....
The following two projects of equal risk are mutually exclusive alternatives for expanding the firm’s capacity. The firm’s cost of capital is 15%. The cash flows for each project are given in the following table. PROJECT A PROJECT B Initial investment 210,000 20,000 Year Net cash inflows Net cash inflows 1 15,000 12,000 2 30,000 10,500 3 32,000 9,500 4 425,000 8,200
The cash flows for four mutually exclusive alternatives are provided in the table below. If the...
The cash flows for four mutually exclusive alternatives are provided in the table below. If the useful life is 10 years for each alternative, find the best alternative using incremental rate of return analysis. MARR = 10% P Q R S Initial Cost 19,000 16,000 11,000 8,500 EUAB 3,500 3,100 2,200 1,350 A. Alt. S B. Alt. P C. Alt. Q D. Alt. R
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT