Following are the cash flows and a MARR for a proposal with two mutually exclusi
ID: 2622542 • Letter: F
Question
Following are the cash flows and a MARR for a proposal with two mutually exclusive alternatives where only one or none of the alternatives can be chosen.
Please Provide Excel Formula
a. Using a 3-Year discounted payback period criterion, which alternative should be accepted?
b. Using a 4-Year discounted payback period criterion, which alternative should be accepted?
MARR= 14% Year 0 1 2 3 4 5 Alternative A ($3,000) $500 $750 $1,100 $1,500 $1,200 Alternative B ($4,700) $1,100 $1,500 $2,000 $2,500 $2,200Explanation / Answer
We need to calculate the present worth for both the alternatives
MARR = 14%
a) For 3 year discounted payback period
The present value of the cash flow for 3 years is
Alternative A = -3000 + 500/(1 + 0.14)^1 + 750/(1 + 0.14)^2 + 1100/(1 + 0.14)^3
= -3000 + 1758.166
= -$1241.83
Alternative B = -4700 + 1100/(1 + 0.14)^1 + 1500/(1 + 0.14)^2 + 2000/(1 + 0.14)^3
= -4700 + 3469.057
= -$1230.94
Ideally none of the alternatives should be accepted. Choose alt B if you have to select one since it has got lesser -ve value
a) For 4 year discounted payback period
The present value of the cash flow for 3 years is
Alternative A = -3000 + 500/(1 + 0.14)^1 + 750/(1 + 0.14)^2 + 1100/(1 + 0.14)^3 + 1500/(1 + 0.14)^4
= -3000 + 2646.186
= -$353.714
Alternative B = -4700 + 1100/(1 + 0.14)^1 + 1500/(1 + 0.14)^2 + 2000/(1 + 0.14)^3 + 2500(1 + 0.14)^4
= -4700 + 4949.257
= $249.573
Hence Alternative B is the right choice