Question

1. Consider three mutually exclusive alternatives. The MARR is 10%based on the payback period method, which alternative should be selected?

Year             X           Y           Z

0                   -$100    -$50      -$50

1                   25          16          21

2                   25          16          21

3                   25          16          21

4                   25          16          21

2. Consider three mutually exclusive alternatives, each with a 20 year life span and no salvage value. The minimum attractive rate of return is 6%.

A                         B                           C

Initial Cost                                     $4000                 $8000                           $10,000

Uniform Annual Benefit ($)            410                     639                           700

Answer 1

1. Payback period of X = Investment / Annual Cash Flow = $100 / 25 = 4 years

Payback period of Y = Investment / Annual Cash Flow = $50 / 16 = 3.125 Years

Payback period of Z = Investment / Annual Cash Flow = $50 / 21 = 2.381 Years

Select Project Z since its payback period is lowest amount three projects

2. Project A's NPV = uniform annual benefit * Present value annuity factor (8%,20 years) - Initial cost

Project A's NPV = 410 * 9.8181 - 4000

Project A's NPV = $25.44

Project B's NPV = uniform annual benefit * Present value annuity factor (8%,20 years) - Initial cost

Project B's NPV = 639 * 9.8181 - 8000

Project B's NPV = - $1726.20

Project C's NPV = uniform annual benefit * Present value annuity factor (8%,20 years) - Initial cost

Project C's NPV = 700 * 9.8181 - 10000

Project C's NPV = - $3127.30

Project A should be selected as its NPV is positive