Two alternative courses of action have he following schedules of disbursement: Y
ID: 1179917 • Letter: T
Question
Two alternative courses of action have he following schedules of disbursement:
Year Option A Option B
----------------------------------------------------
0 -$1300 0
1 0 -$100
2 0 -$200
3 0 -$300
4 0 -$400
5 0 -$500
----------------------------------------------------
-$1300 -$1500
Based on a 6% interest rae, which alternative should be selected?
Explanation / Answer
Hi,
Please find the answer as follows:
You need to calculate the Present Value of both the alternatives to arrive at a decision.
Option A
Present Value = -1300 (since there are no other cash flows during the remaining life of the project)
Option B
Present Value = 0 - 100/(1+.06)^1 - 200/(1+.06)^2 - 300/(1+.06)^3 - 400/(1+.06)^4 - 500/(1+.06)^5 = -1214.69
Based on the above calculations, Option B should be selected as it has lower Present Value in terms of Cost.
Thanks.