Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below. What is the financial advantage (disadvantage) of Alternative Y over Alternative X?
A) $(148,200)
B) $133,500
C) $162,900
D) $(29,400)

Question

Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below.  What is the financial advantage (disadvantage) of Alternative Y over Alternative X?
A) $(148,200) 
B) $133,500 
C) $162,900 
D) $(29,400)

Quizplus · Accepted Answer

To determine the financial advantage (or disadvantage) of Alternative Y over Alternative X, we need to calculate the net present value (NPV) for each alternative and compare them. Using a discount rate of 10%, the NPV for Alternative X is calculated as follows:

NPV(X) = -500,000 + (150,000/1.1) + (150,000/1.1^2) + (200,000/1.1^3) + (200,000/1.1^4)
NPV(X) = -500,000 + 136,364 + 123,967 + 157,528 + 142,895
NPV(X) = $60,754

Similarly, the NPV for Alternative Y is calculated as follows:

NPV(Y) = -1,000,000 + (300,000/1.1) + (300,000/1.1^2) + (400,000/1.1^3)
NPV(Y) = -1,000,000 + 272,727 + 247,934 + 314,244
NPV(Y) = $135,905

Therefore, the financial advantage of Alternative Y over Alternative X is:

NPV(Y) - NPV(X) = $135,905 - $60,754 = $75,151

This means that Alternative Y has a financial advantage of $75,151 over Alternative X. Thus, the best choice is Alternative Y.

Two Alternatives, Code-Named X and Y, Are Under Consideration at Guyer