Question

1. Consider three mutually exclusive alternatives, each with a 20 year life span and no salvage value. The minimum attractive rate of return is 6%.

A                         B                           C

Initial Cost                                     $4000                 $8000                           $10,000

Uniform Annual Benefit ($)            410                     639                           700

Find the preferred alternative based on an analysis of your choice. Also estimate the sensitivity of this alternative to changes in the cost and benefit structure

2. A firm is considering three mutually exclusive alternatives as part of a production improvement program. The alternatives are as follows:

A                         B                            C

Installed Cost ($)                                   10,000                 15,000                 20,000

Uniform Annual benefit ($)                    1,625            1,625                  2000

Useful life (Years)                                 20                 20                       20         

For each alternative, the salvage value is zero. The MARR is 6%. Which alternative should be selected based on the INCREMENTAL ANALYSIS method?

Answer 1

Alternative A will be chosen as the NPV is postive compared to the other two alternatives whose NPV are negetive.