1 answer

Compare the alternatives shown below on the basis of their capitalized costs, using an effective rate...

Question:

Compare the alternatives shown below on the basis of their capitalized costs, using an effective rate 3% per quarter compound

Compare the alternatives shown below on the basis of their capitalized costs, using an effective rate 3% per quarter compounded quarterly Calculate the Capitalized Cost for each alternative and select the best option. Do not select until you have calculated the Capitalized Cost for each alternative. Alternative A Alternative B First Cost in $ -350,000 -700,000 Quarterly income, $/quarter +55,000 +45,000 Salvage value, $ +50,000 0.00 Life, in quarters 12 quarters Select Alternative A with CCA= +$778,733 Select Alternative B with CC = +$800,000 Select Alternative B with CCB= +$1,500,000 Select Alternative A with CCA= +$661,300

Answers

AW of A = -350000 * (A/P, 3%,12) + 55000 + 50000 * (A/F, 3%,12)

= -350000 *0.100462 + 55000 + 50000 *0.070462

= 23361.37

CC of A = 23361.37 / 0.03 = 778712.47

CC of B = -700000 + 45000 / 0.03 = 800000

We should select option B, as it has more positive worth

Second option is correct answer

.

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