Question

A firm must choose between two investment alternatives, each costing $95,000. The first alternative generates $35,000 a year for four years. The second pays one large lump sum of $160,100 at the end of the fourth year. If the firm can raise the required funds to make the investment at an annual cost of 12 percent, what are the present values of two investment alternatives? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar.
PV_{(First alternative)}: $  
PV_{(Second alternative)}: $  

Which alternative should be preferred?
The______ (first or second) alternative should be preferred.

Appendix B

$Appendix_B.jpg$

Appendix D

$Appendix_D.jpg$

Answer 1

PV of first alternative = -Initial cost + PV of cash inflows

= -95000+35000*(P/A,12%,4)

= -95000+35000*3.037

=11295

PV_{(Second alternative)}= -Initial cost + CF*(P/F,12%,4)

= -95000+160100*0.636

= 6823.60

The first alternative should be chosen since it has higher Present value.