Question

ÃO RESET 8-22 Consider three mutually exclusive alternatives that have a uniform annual benefit of $420. The analysis period is 8 years. Assume identical replacements and construct a choice table for interest rates from 0% to 100% (a) Assume doing nothing is allowed. (b) Assume A, B, or C must be chosen 8-26 B $2563 Initial cost $770 Useful life (years) 2 Rate of return 6.0% $1406 4 7,5% 6,4% Cancel Done
please state choice a b or c and show the equations used not excel.

Answer 1

		A
Year	Cash Flow	Discountig Factor [1/(1.06^period)]	PV of cash flows (cash flow*discounting factor)
0	-770	1	-770
1	420	0.9433962	396.226415
2	420	0.8899964	373.798505
		NPV= Sum of PVs	0.0249199

		B
Year	Cash Flow	Discountig Factor [1/(1.075^period)]	PV of cash flows (cash flow*discounting factor)
0	-1406	1	-1406
1	420	0.9302326	390.697674
2	420	0.8653326	363.439697
3	420	0.8049606	338.083439
4	420	0.7488005	314.496223
		NPV= Sum of PVs	0.71703325

		C
Year	Cash Flow	Discountig Factor [1/(1.064^period)]	PV of cash flows (cash flow*discounting factor)
0	-2563	1	-2563
1	420	0.9398496	394.736842
2	420	0.8833173	370.993273
3	420	0.8301854	348.677888
4	420	0.7802495	327.704782
5	420	0.7333172	307.993216
6	420	0.6892079	289.467308
7	420	0.6477518	272.055741
8	420	0.6087893	255.691486
		NPV= Sum of PVs	4.3205352

a) Although, NPV of Project C is Positive, it is Immaterial campared to the Investment required. So, It is better to do NOTHING.

b) If one of the Projects must be choosen, then in that case Project C should be choosen.