Discussion
Two alternatives cost 40 000 and 60 000, with annual savings of 9000 and 12 500 over 8 years. At 10 per cent the increment of 20 000 buying 3500 a year has a present worth of about
Answer: D
Correct answer: -1330
\[ PW = -20{,}000 + 3{,}500 \times (P/A, 10\%, 8) = -20{,}000 + 3{,}500 \times 5.3349 = -1{,}328. \] The extra 20,000 does not earn its keep at 10 per cent, so the cheaper alternative is preferred - even though the dearer one saves more in absolute terms every year.
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