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A new tennis court complex is planned. Each of two alternatives will last 18 years, and the interest rate is 7%. Use present worth analysis to determine which should be selected.

Construction Cost Annual O&M
A $500,000 $25,000
B 640,000 10,000

Respuesta :

Answer:

B should be selected.

Explanation:

Below is the calculation of net present worth:

Present value of A = -500000 - 25000 * (P/A, 7%,18)

Present value = -500000 - 25000 * 10.059087  

Present value = -751477.17

Present value of B = -640000 - 10000 * (P/A, 7%,18)

Present value = -640000 - 10000 * 10.059087

Present value = -740590.87

The present value of B is lower so it will be selected.