Question

(TMAR) Do a rate of return analysis to select the most convenient alternative, if the company's TMAR is 6%

	A	B
initial cost	8000	12000
operation annual cost	1400	900
salvage value	1000	2000
useful life	5	10

Answer 1

We have been given the following information

Alternative A

Initial Cost = 8,000

Operation annual cost = 1,400

Salvage value = 1,000

Useful life = 5 years

Present Worth = – 8,000 – 1,400((P/A, 6%, 5) + 1,000(P/F, 6%,5)

Present Worth = – 8,000 – (1,400×4.212) + (1,000×0.7473)

Present Worth = – 8,000 – 5896.8 + 747.3

Present Worth of Alternative A = – 13,149.5

Alternative B

Initial Cost = 12,000

Operation annual cost = 900

Salvage value = 2,000

Useful life = 10 years

Present Worth = – 12,000 – 900((P/A, 6%, 10) + 2,000(P/F, 6%,10)

Present Worth = – 12,000 – (900×7.360) + (2,000×0.5584)

Present Worth = – 12,000 – 6,624 + 1,116.8

Present Worth of Alternative B = – 17,507.2

Comparing the alternatives we can say that Alternative A will be chosen as it has a lower negative equivalent present worth compared to Alternative B.