Analysis period for the four mutually exclusive alternatives
A cost analysis is to be made to determine what, if anything, should be done in a situation offering three “do-something” and one “do-nothing” alternatives. Estimates of the cost and benefits are as follows:
Alternatives 1 2 3 4
Cost 500 600 700 0
UAB 120 100 100 0
Salvage 0 200 100 0
Life(yrs) 5 5 10 0
Use a 10-year analysis period for the four mutually exclusive alternatives. At the end of Year 5, Alternatives 1 and 2 may be replaced with identical alternatives ( with the same cost, benefits, salvage value, and useful life). (a) If a 6% interest rate is used, which alternative should be selected? (b) If a 10% interest rate is used, which alternative should be selected?
