Question
In: Economics
1.) Consider the following two mutually exclusive alternatives. A B Cost Rs. 4,000 Rs. 6,000 Uniform...
1.) Consider the following two mutually exclusive alternatives.
A B
Cost Rs. 4,000 Rs. 6,000
Uniform annual benefit Rs. 640 Rs. 960
Useful life (years) 20 20
Using a 15% interest rate, determine which alternative should be selected
based on the future worth method of compa rison.
2.) Due to increasing awareness of customers, two different
television
manufacturing companies started a marketing war. The details
of
advertisements of the companies are as follows:
Brand X Brand Y
Selling price of a TV set Rs. 15,000 Rs. 10,000
Amount returned to buyer after 5 years Rs. 8,000 –
Select the most economical brand from the customer’s point of view
using
the future worth method of comparison, assuming an interest rate of
15%,
compounded annually.
Solutions
Expert Solution
| Answer 1: | ||||||
| A | B | |||||
| Cost | 4,000.00 | 6,000.00 | ||||
| FV of cost (a) | 4,000 * (1.15)^20 | 6,000 * (1.15)^20 | ||||
| 65,466.15 | 98,199.22 | |||||
| Uniform annual benefit | 640.00 | 960.00 | ||||
| Useful life | 20 years | 20 years | ||||
| FV of annual benefit (b) | 65,563.89 | 98,345.84 | ||||
| Future worth (b-a) | 97.74 | 146.61 | ||||
| REJECT | SELECT | |||||
| Since, future worth is higher in B, So, we should select B. | ||||||
| Year | FV factor | Uniform annual benefit | FV of annual benefit | |||
| A | B | A | B | |||
| 1 | 14.2318 | 640.00 | 960.00 | 9,108.33 | 13,662.50 | |
| 2 | 12.3755 | 640.00 | 960.00 | 7,920.29 | 11,880.44 | |
| 3 | 10.7613 | 640.00 | 960.00 | 6,887.21 | 10,330.81 | |
| 4 | 9.3576 | 640.00 | 960.00 | 5,988.88 | 8,983.32 | |
| 5 | 8.1371 | 640.00 | 960.00 | 5,207.72 | 7,811.58 | |
| 6 | 7.0757 | 640.00 | 960.00 | 4,528.45 | 6,792.68 | |
| 7 | 6.1528 | 640.00 | 960.00 | 3,937.78 | 5,906.68 | |
| 8 | 5.3503 | 640.00 | 960.00 | 3,424.16 | 5,136.24 | |
| 9 | 4.6524 | 640.00 | 960.00 | 2,977.53 | 4,466.30 | |
| 10 | 4.0456 | 640.00 | 960.00 | 2,589.16 | 3,883.74 | |
| 11 | 3.5179 | 640.00 | 960.00 | 2,251.44 | 3,377.16 | |
| 12 | 3.0590 | 640.00 | 960.00 | 1,957.77 | 2,936.66 | |
| 13 | 2.6600 | 640.00 | 960.00 | 1,702.41 | 2,553.62 | |
| 14 | 2.3131 | 640.00 | 960.00 | 1,480.36 | 2,220.54 | |
| 15 | 2.0114 | 640.00 | 960.00 | 1,287.27 | 1,930.90 | |
| 16 | 1.7490 | 640.00 | 960.00 | 1,119.36 | 1,679.05 | |
| 17 | 1.5209 | 640.00 | 960.00 | 973.36 | 1,460.04 | |
| 18 | 1.3225 | 640.00 | 960.00 | 846.40 | 1,269.60 | |
| 19 | 1.1500 | 640.00 | 960.00 | 736.00 | 1,104.00 | |
| 20 | 1.0000 | 640.00 | 960.00 | 640.00 | 960.00 | |
| 65,563.89 | 98,345.84 | |||||
| Answer 2: | Brand X | Brand Y | ||||
| Selling price of TV set | 15,000.00 | 10,000.00 | ||||
| FV of Amount returned to buyer (b) |
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