Solve the following problem using the present worth analysis for an interest rate of 8%. Alt. A Alt. B Alt. B Initial cost $1,700 $2,100|$3,750 Benefit/year 1,000 |1,000 |1,000 Life in years2 6
Solve the following problem using the present worth analysis for an interest rate of 8%. Alt. A Alt. B Alt. B Initial cost $1,700 $2,100|$3,750 Benefit/year 1,000 |1,000 |1,000 Life in years2 6
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Problem Statement: Present Worth Analysis**
Solve the following problem using the present worth analysis for an interest rate of 8%.
| | Alt. A | Alt. B | Alt. C |
|----------------|--------|--------|--------|
| **Initial cost** | $1,700 | $2,100 | $3,750 |
| **Benefit/year** | $1,000 | $1,000 | $1,000 |
| **Life in years** | 2 | 3 | 6 |
**Explanation:**
This table presents three alternative investments (Alt. A, Alt. B, Alt. C) each with different initial costs, annual benefits, and life spans in years. The goal is to determine which alternative has the highest present worth using an interest rate of 8%.
- **Initial Cost:** The upfront investment required for each alternative.
- **Benefit/Year:** The annual financial return received from each alternative.
- **Life in Years:** The expected operational life span of each alternative in years.
**Analytical Steps:**
1. Calculate the present worth (PW) for each alternative using the formula:
\[
PW = \sum \left(\frac{{\text{Benefit}}}{{(1 + r)^n}}\right) - \text{Initial Cost}
\]
where \( r \) is the interest rate (0.08 in this case), and \( n \) is the year.
2. Compare the present worth of each alternative and determine the most financially viable option.
Use this analysis to make informed investment decisions based on maximizing the return over the life span of each alternative.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5a1d3c22-9c9e-4944-ba32-366314521286%2Fc2310deb-aba4-49fe-8bd1-b5a258733ee7%2Flk9wpll_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Problem Statement: Present Worth Analysis**
Solve the following problem using the present worth analysis for an interest rate of 8%.
| | Alt. A | Alt. B | Alt. C |
|----------------|--------|--------|--------|
| **Initial cost** | $1,700 | $2,100 | $3,750 |
| **Benefit/year** | $1,000 | $1,000 | $1,000 |
| **Life in years** | 2 | 3 | 6 |
**Explanation:**
This table presents three alternative investments (Alt. A, Alt. B, Alt. C) each with different initial costs, annual benefits, and life spans in years. The goal is to determine which alternative has the highest present worth using an interest rate of 8%.
- **Initial Cost:** The upfront investment required for each alternative.
- **Benefit/Year:** The annual financial return received from each alternative.
- **Life in Years:** The expected operational life span of each alternative in years.
**Analytical Steps:**
1. Calculate the present worth (PW) for each alternative using the formula:
\[
PW = \sum \left(\frac{{\text{Benefit}}}{{(1 + r)^n}}\right) - \text{Initial Cost}
\]
where \( r \) is the interest rate (0.08 in this case), and \( n \) is the year.
2. Compare the present worth of each alternative and determine the most financially viable option.
Use this analysis to make informed investment decisions based on maximizing the return over the life span of each alternative.
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