Chapter 8, Problem 15. Consider 4 mutually exclusive alternatives, each having a
ID: 1860006 • Letter: C
Question
Chapter 8, Problem 15.
Consider 4 mutually exclusive alternatives, each having an 8-year useful life:
A:
First cost: $1000
Uniform Annual Benefit: 122
Salvage Value: 750
B:
First cost: $800
Uniform Annual Benefit: 120
Salvage value: 500
C:
First cost: $600
Uniform Annual benefit: 97
Salvage Value: 500
D:
First Cost: $500
Uniform Annual Benefit: 122
Salvage Value: 0
a) Construct a choice table for interest rates from 0% to 100%. I would prefer to do the work here, I just don't know how to do it. Please show me the necessary formulas or programs I need to complete this task.
b) If the MARR is 8%, which alternative should be selected? Again, please show all work so I can understand how to preform these tasks on my own. Thank you.
Explanation / Answer
Incremental Rate of Return Solution
A
B
C
D
C - D
B %u2013 C
A- C
Cost
$1,000
$800
$600
$500
$100
$200
$400
Uniform Annual Benefit
$122
$120
$97
$122
-$25
$23
$25
Salvage Value
$750
$500
$500
$0
$500
$0
$250
Compute Incremental Rate of Return
10%
< 0%
1.8%
The C- D increment is desirable. Reject D and retain C.
The B- C increment is undesirable. Reject B and retain C.
The A- C increment is undesirable. Reject A and retain C.
Conclusion: Select alternative C.
Net Present Worth Solution
Net Present Worth = Uniform Annual Benefit (P/A, 8%, 8)+ Salvage Value (P/F, 8%, 8) %u2013 First Cost
NPWA = $122 (5.747) + $750 (0.5403) - $1,000 = +$106.36
NPWB = $120 (5.747) + $500 (0.5403) - $800 = +$159.79
NPWC = $97 (5.747) + $500 (0.5403) - $600 = +$227.61
NPWD = $122 (5.747) - $500 = +$201.13
A
B
C
D
C - D
B %u2013 C
A- C
Cost
$1,000
$800
$600
$500
$100
$200
$400
Uniform Annual Benefit
$122
$120
$97
$122
-$25
$23
$25
Salvage Value
$750
$500
$500
$0
$500
$0
$250
Compute Incremental Rate of Return
10%
< 0%
1.8%