Question

Three mutually exclusive alternatives are being considered. A, B, C:

Initial Investment: $50,000, $22,000, $15,000
Annual Net Income: $5,093, $2,077, $1,643
Rate of Return: 8%, 7%, 9%
Each alternative has a 20-year period. Which alternative would you recommend?

Answer 1

Comparing the present values, we can see that Alternative A has the highest value, so it is the recommended alternative.

Step-by-step explanation:

To determine which alternative to recommend, we need to calculate the present value of the net income for each alternative using the rate of return. Present value is calculated using the formula:

Present Value = Annual Net Income / (1 + Rate of Return)^(Number of Years)

• For Alternative A: Present Value = $5,093 / (1 + 0.08)^20 = $2,060.69
• For Alternative B: Present Value = $2,077 / (1 + 0.07)^20 = $863.11
• For Alternative C: Present Value = $1,643 / (1 + 0.09)^20 = $585.55

Upon reviewing the current figures, it's evident that Alternative A boasts the highest value, thus making it the suggested choice among the options.