Homework Answers
Since the life of the two alternatives have unequal lives, we have to take the LCM of the lives of the alternatives. The LCM is 10.
Alternative A:
Net annual benefits = 1,500 - 500 = 1,000
PW of alternative A = -5,000 + 1,000(P/A, 8%, 10) - (5,000 - 500)(P/F, 8%, 5) + 500(P/F, 8%, 10)
= -5,000 + 1,000(6.710) - 4,500(0.6806) + 500(0.4632)
= -5,000 + 6,710 - 3,062.7 + 231.6
= -$1,121.1
Alternative B:
Net annual benefits = 800 - 200 = 600
PW of alternative B = -4,000 + 600(P/A, 8%, 10)
= -4,000 + 600(6.710)
= $26
Since PW of alternative B is positive, therefore, alternative B is better alternative.
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