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The Director of Health Services at MSU is working to select the better of two medical x-ray systems.
Alternative A Alternative B
First Cost, $ -250,000 -224000
Annual Operating Cost $ per year -231,000 -235,000
Salvage Value $ 50,000 10,000
Expected life, years 6 6
At 5% per year, which alternative should be selected?
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A) Alternative A |
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| b) Alternative B | ||
| c) |
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Expert Answer
Let us find out the present value of both alternatives :-
Alternative A :- – 250000 – 231000 * PVIFA ( 5 % , 6 years ) + 50000 * PVIF ( 5 % , 6 years )
-250000 – 231000 * 5.0757 + 50000 * 0.7462
-250000 – 1172487 + 37310 = ( 1385177 )
Alternative B :- – 224000 – 235000 * PVIFA ( 5 % , 6 years ) + 10000 * PVIF ( 5 % , 6 years )
-224000 – 235000 * 5.0757 + 10000 * 0.7462
-224000 – 1192790 + 7462 = ( 1409328 )
So, alternative A is better as its present value of cost is lower than alternative B.
