Question

Alternative	Fisrt cost	Annual cost	Annual Savings	Life Year
A	$ (1,100,000.00)	$ (24,000.00)	$      180,000.00	20
B	$ (1,500,000.00)	$ (36,000.00)	$      245,000.00	20
C	$ (1,750,000.00)	$ (41,000.00)	$      295,000.00	20

9.24 The local electric company may renovate a number of substations within its system. Various costs and savings can be anticipated, depending on the type of renovation performed. Using benefit/cost analysis and an interest rate of 12%, determine which alterna- tive should be chosen.

Answer 1

Answer:

	Alternative A	Alternative B	Alternative C
Present value of annual Savings	$1,344,499.20	$1,830,012.80	$2,203,484.80
(Less):Present value of annual costs	($179,266.56)	($268,899.84)	($306,247.04)
(Less):First cost	($1,100,000.00)	($1,500,000.00)	($1,750,000.00)
Net present value (NPV)	$65,232.64	$61,112.96	$147,237.76

Alternative C should be choose because it has higher NPV.

Calculations:

	Alternative A	Alternative B	Alternative C
Present value of annual Savings
[$180,000 x 7.46944 present value annuity factor (12%,20 years)]	$1,344,499.20
[$245,000 x 7.46944 present value annuity factor (12%,20 years)		$1,830,012.80
[$295,000 x 7.46944 present value annuity factor (12%,20 years)			$2,203,484.80
Present value of annual cost
[$24,000 x 7.49644 present annuity factor (12%,20 years)]	$179,266.56
[$36,000 x 7.49644 present annuity factor (12%,20 years)]		$268,899.84
[$41,000 x 7.49644 present annuity factor (12%,20 years)]			$306,247.04