Question

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 |

Answer #1

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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