The construction of the building now to cost P 400,000
The construction of a smaller building now to cost P300,000 and at the end of 5 years, an extension to be added to cost P 200,000. By how much is proposal B more economical than proposal A if interest rate is 20% and depreciation to be neglected? A. P 19,122.15 B. P 19,423.69
P 19,518.03
P 19,624.49
Answer is Right!
Answer is Wrong!
The correct answer is A. P 19,122.15.
Proposal A costs P 400,000 now.
Proposal B costs P 300,000 now and P 200,000 in 5 years. The present value of P 200,000 in 5 years at 20% interest is P 128,205.47. Therefore, the total cost of proposal B is P 300,000 + P 128,205.47 = P 428,205.47.
Proposal B is more economical than proposal A by P 428,205.47 – P 400,000 = P 28,205.47.
The present value of P 28,205.47 in 5 years at 20% interest is P 19,122.15. Therefore, proposal B is more economical than proposal A by P 19,122.15.
Here is a breakdown of the calculations:
- Present value of P 400,000 at 20% interest for 0 years = P 400,000
- Present value of P 200,000 at 20% interest for 5 years = P 128,205.47
- Total cost of proposal B = P 300,000 + P 128,205.47 = P 428,205.47
- Difference in cost between proposals A and B = P 428,205.47 – P 400,000 = P 28,205.47
- Present value of P 28,205.47 at 20% interest for 5 years = P 19,122.15
Therefore, proposal B is more economical than proposal A by P 19,122.15.