Two alternatives are being considered: AB
Two alternatives are being considered:
AB
Initial cost$9200$5000
Uniform annual benefit18501750
Useful life, in years84
Base your computations on a MARR of 7% and an 8-year analysis period. If identical replacement is assumed, which alternative should be selected?
Two alternatives are being considered: A B Initial cost $9,200 $5,000 Uniform annual benefit 1,850 1,750 Useful life, in years 8 4 Question: Base your computations on a MARR of 7% and an 8-year analysis period. If identical replacement is assumed, which alternative should be selected? r = 7% n = 8 yrs Minimum Attractive Rate of Return (MARR) – It represents the required or minimum Internal Rate of Return for a project investment. IRR- rate of return at which NPV is 0 IRR = NPV I.0 = 0 NPV = Cf – I.0 (1+r)^n Project A NPV = 1,850 PVIF7%8yrs 9,200 PVIF = 1-(1+r)^-n r PVIF = 1-(1+0.07)^-8 0.07 PVIF = 1- (1.07)-8 0.07 PVIF = 1- 0.5820 0.07 PVIF = 0.4180 0.07 PVIF = 5.9713 NPV = (1,850*5.9713) 9,200 NPV = 11,046.902 9,200 NPV = 1,846.902 Project B. n = 4 years r = 7% IRR = PV…
sh; I.0 PV = Cf – I.0 (1+r)^n PV = 1,750 PVIF7%4yrs 5,000 PVIF = 1-(1+r)^-n/r PVIF = 1-(1+0.07)^-4/0.07 PVIF = 1- (1.07)^-4/0.07 PVIF = (1- 0.7629)/0.07 PVIF = 0.2371/0.07 PVIF = 3.3872 NPV = (1,750*3.3872) 5,000 NPV = 5,927.620 5,000 NPV = 927.620 Decision Criteria Basing the decision on NPV, project A should be selected since it has a higher NPV of 1,846.902. The NPV of project A is more than that of B by $ 919.282 (1,846.902-927.620) and hence project A should be selected since it has higher net cash flows.
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