You have been asked to compare two alternatives, X and Y. MARR is 8% EOY X...
You have been asked to compare two alternatives, X and Y. MARR is 8%
| EOY | X | Y |
|
0 |
-4800 | -4200 |
| 1 | 2000 | 2000 |
| 2 | 2500 | 2250 |
| 3 | 3000 | 2500 |
| NPV @ 8% | 1576.70 |
1565.40 |
- Which alternative would you recommend if using a Net Present Value measure of worth? Why?
b. Which alternative would you recommend if using a Benefit/Cost measure of worth? Why?
Homework Answers
a. As NPV of X is more than Y, so X should be selected
b. We need to perform incremental B/C analysis
Incremental initial cost (X-Y) = 4800 - 4200 = 600
Incremental cash flow in EOY 1 (X-Y) = 2000 - 2000 = 0
Incremental cash flow in EOY 2 (X-Y) = 2500 - 2250 = 250
Incremental cash flow in EOY 3 (X-Y) = 3000 - 2500 = 500
Incremental B/C ratio (X-Y) = 250 * (P/G, 8%,3) / 600
= 250 * 2.4450 / 600
= 611.25 / 600
= 1.02
As Incremental B/C ratio (X-Y) is more than 1, X should be selected
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