Question

1. Use the present worth analysis method to determine which alternative (A or B) one should chose. Assume that the interest i= 8% per year.

	A	B
Frist Cost	$6500	$12000
Annual Benefit	$2000	$2300
Salvage Value	$1300	$750
Useful Life in years	5	10

a.) Compute the net present worth of alternative A.

$3630, $3780, $3985, or $4168

b.) Compute the net present worth of alternative B.

$3630, $3780, $3985, or $4168

c.) Which alternative should one choose?

Either alternative, Choose alternative A, Choose alternative B, or Choose neither alternative

Answer 1

a.) Computation of the net present worth of alternative A:

Particulars	Amount (A)	Present Value factore (8%) (B)	Present Value (A X B)
Annual Benefit	$2,000	3.993	$7,986
Salvage Value	$1,300	0.681	$885
Total Cash inflow			$8,871
Less: Frist Cost	$6,500	1.000	$6,500
Net present worth			$2,371

b.) Computation of the net present worth of alternative B:

Particulars	Amount (A)	Present Value factore (8%) (B)	Present Value (A X B)
Annual Benefit	$2,300	6.710	$15,433
Salvage Value	$750	0.463	$347
Total Cash inflow			$15,780
Less: Frist Cost	$12,000	1.000	$12,000
Net present worth			$3,780

c.) We should choose  alternative B, beacuse it has higher Net Present worth.