Using an 20year analysis period and a 625 interest rate dete

Using an 20-year analysis period and a 6.25% interest rate, determine whether alternative A or B should be selected.

Solution

Net present value(NPV) of Alternative A Net present value(NPV) of Alternative B Year,n Cashflow PV factor @ 6.25 = (1/(1+r)^n) PV of cashflow Year,n Cashflow PV factor @ 6.25 = (1/(1+r)^n) PV of cashflow 0 -8000 1 -8000 0 -12000 1 -12000 1 1250 0.941176471 1176.470588 1 2000 0.941176471 1882.352941 2 1250 0.885813149 1107.266436 2 2000 0.885813149 1771.626298 3 1250 0.833706493 1042.133116 3 2000 0.833706493 1667.412986 4 1250 0.784664935 980.8311682 4 2000 0.784664935 1569.329869 5 1250 0.738508174 923.1352171 5 2000 0.738508174 1477.016347 6 1250 0.695066516 868.8331455 6 2000 0.695066516 1390.133033 7 1250 0.654180251 817.7253135 7 2000 0.654180251 1308.360502 8 1250 0.61569906 769.6238244 8 2000 0.61569906 1231.398119 9 1250 0.579481468 724.3518348 9 2000 0.579481468 1158.962936 10 1250 0.545394323 681.7429033 10 2000 0.545394323 1090.788645 11 1250 0.513312304 641.6403796 11 2000 0.513312304 1026.624607 12 1250 0.483117462 603.8968278 12 2000 0.483117462 966.2349245 13 1250 0.454698788 568.373485 13 2000 0.454698788 909.397576 14 1250 0.4279518 534.9397506 14 2000 0.4279518 855.903601 15 1250 0.402778165 503.4727065 15 2000 0.402778165 805.5563303 16 1250 0.379085332 473.8566649 16 2000 0.379085332 758.1706638 17 1250 0.356786195 445.9827434 17 2000 0.356786195 713.5723895 18 1250 0.335798772 419.7484644 18 2000 0.335798772 671.5975431 19 1250 0.316045903 395.0573783 19 2000 0.316045903 632.0918052 20 1250 0.297454967 371.818709 20 2000 0.297454967 594.9099343 NPV= 6050.900657 NPV= 10481.44105 As the NPV of alternative B is more than alternative A,Alternative B should be selected.