Question

I am so lost on this...I've included a screenshot of my solution after the question, please tell where I'm screwing up. Thank you!

A homeowner is going to renovate his house, then sell it in 10 years. He is considering four renovation package (10 marks): Package 1 Package 2 Package 3 Package 4 Cost $10,000 Cost home at sale: $25,000 Cost $28,000, increased value of home at sale: $45,000 Cost $45,000, increased value of home at sale $100,000 $17.000, increased value of (Increased values are in excess of the sale price obtained for the home if Package 1 is adopted.) If the interest rate is 10%, which option should be adopted on an incremental cost basis? Explain your reasoning.

Answer 1

First

Comparing Package A and Package B

	Package A	Package B	Extra Cost	Extra Benefit
Cost	10,000	17,000	7000
Increased Value	0	25,000		25,000

Life = 10 years, Interest = 10%

Comparing the extra cost with extra benefit

PW = -7,000 + 25,000 (1+.10) ^-10 = 2638.58

As the PW is positive, select Package B, and reject Package A.

Second

Comparing Package B and Package C

	Package B	Package C	Extra Cost	Extra Benefit
Cost	17,000	28,000	11,000
Increased Value	25,000	45,000		20,000

Life = 10 years, Interest = 10%

Comparing the extra cost with extra benefit

PW = -11,000 + 20,000 (1+.10) ^-10 = -3289.13

As the PW is negative, select Package B, and reject Package C.

Third

Comparing Package B and Package D

	Package B	Package D	Extra Cost	Extra Benefit
Cost	17,000	45,000	28,000
Increased Value	25,000	100,000		75,000

Life = 10 years, Interest = 10%

Comparing the extra cost with extra benefit

PW = -28,000 + 75,000 (1+.10) ^-10 = 915.74

As the PW is positive, select Package D, and reject Package B.

Finally, Select Package D.