Homework Answers
Ans:
Plan(A) should be selected.
Select any one out of alternatives, we check present value of cash flows.
Higher present value of cash flows should be selected.
Under plan A,
PV = - 21000
Under plan B,
PV=-[2000/(1+.04)]-[3500/(1+.04)^2]-[5000/(1+.04)^3]-[6500(1+.04)^4]-[8000(1+.04)^5]
=-(2000/1.04)-[3500/(1.04)^2]-[5000/(1.04)^3]-[6500(1.04)^4]-[8000(1.04)^5]
=-(2000/1.04)-(3500/1.08)-(5000/1.12)-(6500/1.17)-(8000/1.22)
=-1923.08-3240.74-4464.26-5555.55-6557.38
=-5163.82-10019.81-6557.38
PV=-21741.01
Since plan A has higher net present value (or least PV of costs), it should be selected.
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