Answer:
Alternative 1 has present worth of $20,000,000.00
Alternative 2 has present worth of $18,543,040.00
Explanation:
The present of the first alternative is the cost of the building the facility now,year zero which is $20 million.The value can be validated as follows:
Year Cash flows Discount factor present worth
cash flow* discount factor
0 $20,00,000 1/(1+10%)^0=1 $20,000,000
The PW of the second alternative:
Year Cash flows Discount factor present worth
cash flow* discount factor
0 $10,000,000 1/(1+10%)^0=1 $10,000,000
4 $8,000,000 1/(1+10%)^4=0.68301 $5,464,080
7 $6,000,000 1/(1+10%)^7=0.51316 $3,078,960
Present worth of second alternative $ 18,543,040
Hence alternative with PW is better as it has lower present worth of $ 18,543,040.00
