Question

Answer the question. onsider the three mutually exclusive alternatives below. Determine which alternative is preferable at an terest rate of 10% per year. Assume all of these projects are repeating perpetually. Alternative A B C Capital investment $400,000 $100,000 $150,000 Annual expense $189,000 $94,500 $134,000 $309,000 $204,500 $300,000 $50,000 $100,000 Annual revenue Salvage value Life, years $65,000 24 36 12 X E B I i Fr

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Answer 1

Answer:

Based on the given information, cash flows of Alternatives A, B, and C can be mapped year-wise as follows:

Capital investment is treated as cash outflow at the beginning of the project

Profit each year = Annual revenue - Annual expense

Salvage value is treated as cash inflow at the end of the project

Year	Project A	Project B	Project C
0	-$400,000	-$100,000	-$150,000
1	$120,000	$110,000	$166,000
2	$120,000	$110,000	$166,000
3	$120,000	$110,000	$166,000
4	$120,000	$110,000	$166,000
5	$120,000	$110,000	$166,000
6	$120,000	$110,000	$166,000
7	$120,000	$110,000	$166,000
8	$120,000	$110,000	$166,000
9	$120,000	$110,000	$166,000
10	$120,000	$110,000	$166,000
11	$120,000	$110,000	$166,000
12	$120,000	$110,000	$266,000
13	$120,000	$110,000
14	$120,000	$110,000
15	$120,000	$110,000
16	$120,000	$110,000
17	$120,000	$110,000
18	$120,000	$110,000
19	$120,000	$110,000
20	$120,000	$110,000
21	$120,000	$110,000
22	$120,000	$110,000
23	$120,000	$110,000
24	$185,000	$110,000
25		$110,000
26		$110,000
27		$110,000
28		$110,000
29		$110,000
30		$110,000
31		$110,000
32		$110,000
33		$110,000
34		$110,000
35		$110,000
36		$160,000

Net Present Value (NPV) of these projects / alternatives at given interest rate of 10% p.a. is

	Project A	Project B	Project C
NPV	$622,517	$878,212	$920,851

Clearly, Alternative C with highest NPV should be the preferred choice.