Choose which is the more preferable option if i = 8%. The more preferable option is the one with the higher present value.
Option A | Option B | |
First Cost | $4000 | $6000 |
Annual Benefit | $1500 | $2000 |
Expected Life | 6 years | 6 years |
NPV = Present Value of Cash Inflow - First Cost
Option A
Present Value of Cash Inflow = Annual benefit * PVAF (8%, 6 years)
= 1500 * 4.62287966383
= 6934.32
NPV = 6934.32 - 4000 = 2934.32
Option B
Present Value of Cash Inflow = Annual benefit * PVAF (8%, 6 years)
= 2000 * 4.62287966383
= 9245.76
NPV = 9245.76 - 6000 = 3245.76
Option B is correct.
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