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3. Consider the following two alternatives: First cost Annual Expense Annual Income Salvage Value Economic Life Alternative 1 Alternative 2 $20,000 $16.000 $5,000 $3.000 $11,500

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3. Consider the following two alternatives: First cost Annual Expense Annual Income Salvage Value Economic Life Alternative 1 Alternative 2 $20,000 $16.000 $5,000 $3.000 $11,500 $11,500 $4,000 $0 8 years 4 years Use the PV method to determine which alternative you prefer. Suppose that the salvage value of Alternative 2 is known with certainty. By how much would the estimate of the salvage value for Alternative 1 have to vary so that the initial decision based on the data above would be reversed? The minimum acceptable rate of return is 15%. (18 points)

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