Question

1. Determine the most profitablealternative using the Net Equivalent Uniform Annual (NEUA) method (variable input – variable output problem). Interest rate = 3%

Alt.	Construction cost $	Benefits $/yr	Service Life (yrs)
A	1,450,000	580,000	8
B	1,600,000	610,000	9

            Net means (Benefits –Costs)

Answer 1

Alternative A-

Cost - 1,450,000

Benefit for 1 year- 580,000

service life- 8 years

Calculating benefit for 8 years- 580,000(3%,8)

= 580,000 (7.0197)

= 4,071,426 $

Net benefiit = 4,071,426- 1,450,000= $ 2,621,426

Alternative B

Cost- 1,600,000

benefit- 610,000

service life- 9 years

Calculating benefit for 9 years- 610,000(3%,9)

=610,000(7.7861)

= $ 4,749,521

Net benefit= 4,749,521 - 1,600,000= 3,149,521 $

Hence, ALTERNATIVE B should be chosen as the benefit is more by $ 528,095.