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In: Economics

Suppose the MARR is 12%. Use the following table to answer the question--Which option should be...

Suppose the MARR is 12%. Use the following table to answer the question--Which option should be selected as the challenger alternative? CMS FMS Initial Investment $20,000 $29,000 Annual Revenue 6,688 9,102 Useful Life (Years) 5 5 A. CMS B. Both options are acceptable challenger alternatives. C. I'm completely lost! D. Neither option is acceptable as a challenger alternative. E. FMS

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Expert Solution

Let's do some computations in teh table below

Time CF - CMS PV - CMS = CF/1.12^Time CF - FMS PV - FMS = CF/1.12^Time CF: FMS-CMS PV = CF/1.12^time
0 -20,000.00 -20,000.00 -29,000.00 -29,000.00 -9,000.00 -9,000.00
1      6,688.00      5,971.43      9,102.00      8,126.79    2,414.00    2,155.36
2      6,688.00      5,331.63      9,102.00      7,256.06    2,414.00    1,924.43
3      6,688.00      4,760.39      9,102.00      6,478.62    2,414.00    1,718.24
4      6,688.00      4,250.34      9,102.00      5,784.49    2,414.00    1,534.14
5      6,688.00      3,794.95      9,102.00      5,164.72    2,414.00    1,369.77
Total      4,108.74      3,810.67      -298.07

We see that CMS and FMS both have a positive NPV. However, the incremental NPV that we get from investing more in FMS is negative over and above the investment we are making in CMS. Hence we should invest in CMS.

Rahul Sunny answered 2 years ago
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