The annual dollar advantage of alternative II over alternative I at an interest rate of
Answer to Problem 74P
The correct option is
Explanation of Solution
Given:
The interest rate is
- A company considering two alternatives
Alternative I | Alternative II | |
First cost | ||
Annual maintenance | ||
Annual savings | ||
Salvage value | ||
Useful life of alternative |
Calculation:
Write the expression to calculate the net annual savings.
Calculate the net annual savings for Alternative I.
Substitute,
Calculate the net annual savings for Alternative II.
Substitute,
Write the expression to determine the net cost of replacement.
Calculate the net cost of replacement for Alternative I.
At the end of year three the initial cost of
Substitute,
The annual cash for each project and the cash flow for a period of 6 years is shown below.
Years | Alternative I | Alternative II |
Write the expression to calculate the net present value of the dollar advantage of alternative II over alternative I.
Here, the interest rate is i and the time period is n.
Substitute,
Write the expression to calculate the annual dollar advantage of alternative II over alternative I.
Here, the annual dollar advantage is A and the net present value is P.
Substitute,
Conclusion:
Therefore, the correct option is
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Chapter D Solutions
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