6-21. Two mutually exclusive design alternatives are being considered for purchase. Doing nothing is also an option. The estimated cash flows for each alternative are given below. The MARR is 8% per year. Using the PW method, which alternative, if either, should be recommended? State your assumptions and your reasoning in arriving at a recommendation. (6.5) - 2,900 (P/A> 8,4) + 2000 (p 2,900(P/A> Capital investment Annual revenues Alternative 1 Alternative 2 $18,000 $9,000 $22,000 $11,000 ETT Annual expenses MV at end of useful life Useful life IRR $2,900 $2,000 $4,000 $500 4 years 16.5% 12 years 30.6% 2 6-21 PW1 (8%)=-18,000+ 6,100 (P/A, 8%, 12)-16,000[(P/F, 8%, 4) + (P/F, 8%,8)] + 2,000 (P/F, 8%, 12) = $8,071.61 PW2 (8%)=-22,000+ 7,000 (P/A, 8%, 12)+500 (P/F, 8%, 12) = $30,951.25 Choose 2 to maximize profitability
6-21. Two mutually exclusive design alternatives are being considered for purchase. Doing nothing is also an option. The estimated cash flows for each alternative are given below. The MARR is 8% per year. Using the PW method, which alternative, if either, should be recommended? State your assumptions and your reasoning in arriving at a recommendation. (6.5) - 2,900 (P/A> 8,4) + 2000 (p 2,900(P/A> Capital investment Annual revenues Alternative 1 Alternative 2 $18,000 $9,000 $22,000 $11,000 ETT Annual expenses MV at end of useful life Useful life IRR $2,900 $2,000 $4,000 $500 4 years 16.5% 12 years 30.6% 2 6-21 PW1 (8%)=-18,000+ 6,100 (P/A, 8%, 12)-16,000[(P/F, 8%, 4) + (P/F, 8%,8)] + 2,000 (P/F, 8%, 12) = $8,071.61 PW2 (8%)=-22,000+ 7,000 (P/A, 8%, 12)+500 (P/F, 8%, 12) = $30,951.25 Choose 2 to maximize profitability
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![6-21. Two mutually exclusive design alternatives are
being considered for purchase. Doing nothing is also
an option. The estimated cash flows for each alternative
are given below. The MARR is 8% per year. Using
the PW method, which alternative, if either, should
be recommended? State your assumptions and your
reasoning in arriving at a recommendation. (6.5)
- 2,900 (P/A> 8,4) + 2000 (p
2,900(P/A>
Capital investment
Annual revenues
Alternative 1 Alternative 2
$18,000
$9,000
$22,000
$11,000
ETT
Annual expenses
MV at end of useful life
Useful life
IRR
$2,900
$2,000
$4,000
$500
4 years
16.5%
12 years
30.6%
2
6-21
PW1 (8%)=-18,000+ 6,100 (P/A, 8%, 12)-16,000[(P/F, 8%, 4) + (P/F, 8%,8)] + 2,000 (P/F, 8%, 12)
= $8,071.61
PW2 (8%)=-22,000+ 7,000 (P/A, 8%, 12)+500 (P/F, 8%, 12)
= $30,951.25
Choose 2 to maximize profitability](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffcb5f897-852d-4b4c-b965-460070435066%2F4c40860f-5a67-4a82-b76b-c74a35e0d470%2F128o9ga_processed.png&w=3840&q=75)
Transcribed Image Text:6-21. Two mutually exclusive design alternatives are
being considered for purchase. Doing nothing is also
an option. The estimated cash flows for each alternative
are given below. The MARR is 8% per year. Using
the PW method, which alternative, if either, should
be recommended? State your assumptions and your
reasoning in arriving at a recommendation. (6.5)
- 2,900 (P/A> 8,4) + 2000 (p
2,900(P/A>
Capital investment
Annual revenues
Alternative 1 Alternative 2
$18,000
$9,000
$22,000
$11,000
ETT
Annual expenses
MV at end of useful life
Useful life
IRR
$2,900
$2,000
$4,000
$500
4 years
16.5%
12 years
30.6%
2
6-21
PW1 (8%)=-18,000+ 6,100 (P/A, 8%, 12)-16,000[(P/F, 8%, 4) + (P/F, 8%,8)] + 2,000 (P/F, 8%, 12)
= $8,071.61
PW2 (8%)=-22,000+ 7,000 (P/A, 8%, 12)+500 (P/F, 8%, 12)
= $30,951.25
Choose 2 to maximize profitability
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