Compare on a per household basis (a) Program 1 vs. DN B = $1.25 per month C = 60(A/P,0.5%,60) = 60(0.01933) = $1.16 B/C = 1.25/1.16 = 1.08 eliminate DN Program 2 vs. 1 ?B = 8.00 – 1.25 = $6.75 ?C = (500 – 60)(A/P,0.5%,60) = 440(0.01933) = $8.51 ?B/C = 6.75/8.51 = 0.79 Select program 1 Solution continued on next page... (b) Program 1: B/C = 1.08 (from above) Acceptable Program 2: B = 8.00 per month C = 500(A/P,0.5%,60) = 500(0.01933) = $9.67

Question

What will be an ideal response?

Answer 1

DN is not an option; compare DA vs. CS; use PW values
By hand: (Note: Omit equal salvage values from both computations)
PW DA = 200,000,000 + 360,000(P/A,8%,50) + 10,000(P/G,8%,50)
+ 4,800,000(P/F,8%,25)
= 200,000,000 + 360,000(12.2335) + 10,000(139.5928) + 4,800,000(0.1460)
= $206,500,788

PW CS = 50,000,000 + 175,000(P/A,8%,50) + 8000(P/G,8%,50) + 100,000[(P/F,8%,10)
+ (P/F,8%,20) + (P/F,8%,30) + (P/F,8%,40)]
= 50,000,000 + 175,000(12.2335) + 8000(139.5928) +100,000[(0.4632) +
(0.2145)
+ (0.0994) + (0.0460)]
= $53,339,915
Domed arena (DA) has a larger total cost; compare DA vs. CS
?C = 206,500,788 - 53,339,915 = $153,160,873
PW of ?B = 10,900,000(P/A,8%,15) + 200,000(P/G,8%,15)
+ 13,700,000(P/A,8%,35)(P/F,8%,15)
= 10,900,000(8.5595) + 200,000(47.8857) + 13,700,000(11.6546)(0.3152)
= $153,203,050
?B/?C = 153,203,050/153,160,873
= 1.00
Select Domed Arena (very marginal decision)