Question

Choice X: Initial cost = -$50,000, Annual revenue = $13,400, Salvage value = $3000, Life =...

Choice X: Initial cost = -$50,000, Annual revenue = $13,400, Salvage value = $3000, Life = 3

Choice Y: Initial cost = -$85,000, Annual revenue = $43,000, Salvage value = $8000, Life = 6

What is the sum of the incremental cash flows, Y-X?

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Answer #1

You need to repeat the cycle of X two times as the LCM of time periods is 6. The required sum is 194,600

Choice X Net cash flow Choice Y Net cash flow Increment Y-X
End of Year Initial cost Annual revenue Salvage value Initial cost Annual revenue Salvage value
0 -50000 -50000 -85000 -85000 -35000
1 13400 13400 43000 43000 29600
2 13400 13400 43000 43000 29600
3 -50000 13400 3000 -33600 43000 43000 76600
4 13400 13400 43000 43000 29600
5 13400 13400 43000 43000 29600
6 13400 3000 16400 43000 8000 51000 34600
Sum -13600 181000 194600
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