Question

If the minimum attractive rate of return is 7%, which alternative should be chosen assuming identical replacement (like kind exchange)
A B
First Cost $5000 $9200
Uniform Annual Benefit $1750 $1850
Useful life ,in years 4 8

Answer 1

Answer:

The alternative that should be chosen assuming identical replacement is:

Alternative B.

Explanation:

a) Data and Calculations:

Alternatives:

                                                A            B

First Cost                           $5,000     $9,200

Uniform Annual Benefit     $1,750      $1,850

Useful life, in years                4              8

Rate of return                       7%            7%

Annuity factor                   3.387          5.971

Present value of annuity $5,927.25 $11,046.35

Net cash flow                 $927.25     $1,846.35

b) Alternative B yields a higher return than Alternative A.  Since the two alternatives are based on the same rate of return, Alternative B will bring in a higher annual benefit, even when discounted to the present value.