Question

engineering economics

Two mutually exclusive alternatives The minimum with a 20-year life and no salvage value. 4. attractive rate of return is 6%. 4000 5000 639 We would like to know how sensitive the the initial cost of ho w much higher than 400) can ce the preferred alternative? (Hint: find the present worth of decision is to our estimate of initial cost be and still have A alternative? . both alternative to start with) (15 pts) a. 4100 b. 4200 С. 4300 d. 4400 ucel Spread sheets, to find P: (10 pts)

Answer 1

PVIFA i.e. Present value of interest factor of annuity for n=20 and i=6% is 11.470

The Net Present Value (NPV) of alternative A where there will be initial cash outflow of 4,000 and annual benefit will be of 639 is 3,329 which is calculated as follows :

639*11.470 - 4,000 i.e. = 3,329

The Net Present Value of alternative B where there will be initial cash outflow of 5,000 and annual benefit will be of 700 is 3,029 which is calculated as follows :

700*11.470 - 5,000 i.e. = 3,029

Here the NPV of alternative A is more than NPV of alternative B by 300 (i.e. 3,329 - 3,029).

Hence till the initial cost of Alternative A is not more than 4,300 (i.e. 4,000 + 300) it will be a preferred alternative.

Hence the correct answer is c) 4,300