Homework Answers
Alpha
Net present value of benefit
=158.3(PVIFA r10%, n5year)
=158.3(3.7908)
=600.08
Ratio=NPVbenefit ÷cost
=600.08/600
=1.0001
Beta
Net present value of benefit
=139.7(PVIFA r10%, n5year)
=139.7(3.7908)
=529.57
Ratio=NPV benefit /cost
=529.7/500
=1.06
Gamma
Net present value of benefit
=58.3(PVIFA r10%, n5year)
=58.3(3.7908)
=221
Ratio = NPV benefit/cost
=221/200
=1.11
Which one is select?
Gamma has a highest ratio among all three investment alternatives so, GAMMA will be selected.
NOTE: 3.7908 amount is taken from the present value interest factor annuity table. As 10% interest rate and 5 year.
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