Two alternatives, A and B, are under consideration. Both have a life of five yea

Question

Two alternatives, A and B, are under consideration. Both have a life of five years. Alternative A needs an initial investment of 17,000 and provides a net revenue of 4,000 per year for five years. Alternative B requires an investment of 19,000 and has an annual net revenue of 5,000. All estimates are in actual dollars. Inflation is expected to be 2% per year for the next inflation-free(real) MARR is 9.8% per year. Which alternative should be chosen?

(a) Alternative A

(b) Altnerative B

(c) Neither Alternative

Explanation / Answer

where:

1.098/1.02 - 1 = 7.65%

Using Excel:

Since NPV B is positive, choose B

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