Question

You and your partner have become very interested in cross-country motorcycle racing and wish to purchase...

You and your partner have become very interested in cross-country motorcycle racing and wish to purchase entry-level equipment. You have identified two alternative sets of equipment and gear. Package K has a first cost of $130,000, an operating cost of $8,500 per quarter, and a salvage value of $60,000 after its 2-year life. Package L has a first cost of $210,000 with a lower operating cost of $3,400 per quarter and an estimated $23,000 salvage value after its 4-year life. Which package offers the lower present worth analysis at an interest rate of 20% per year, compounded quarterly? The present worth of package K is $____ and that of package L is $___ . Which one offers the lower present worth? (please show all work for each step).

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Answer #1
Ppackage-K
Quarter Cash flows PVF @ 5% Present value
0 -130000 1 -130000
1 -8500 0.952381 -8095.24
2 -8500 0.907029 -7709.75
3 -8500 0.863838 -7342.62
4 -8500 0.822702 -6992.97
5 -8500 0.783526 -6659.97
6 -8500 0.746215 -6342.83
7 -8500 0.710681 -6040.79
8 -78500 0.676839 -53131.9
9 -8500 0.644609 -5479.18
10 -8500 0.613913 -5218.26
11 -8500 0.584679 -4969.77
12 -8500 0.556837 -4733.12
13 -8500 0.530321 -4507.73
14 -8500 0.505068 -4293.08
15 -8500 0.481017 -4088.65
16 51500 0.458112 23592.74
Present worth -242013
Package-L
Quarter Cash flows PVF @ 5% Present value
0 -210000 1 -210000
1 -3400 0.952381 -3238.1
2 -3400 0.907029 -3083.9
3 -3400 0.863838 -2937.05
4 -3400 0.822702 -2797.19
5 -3400 0.783526 -2663.99
6 -3400 0.746215 -2537.13
7 -3400 0.710681 -2416.32
8 -3400 0.676839 -2301.25
9 -3400 0.644609 -2191.67
10 -3400 0.613913 -2087.31
11 -3400 0.584679 -1987.91
12 -3400 0.556837 -1893.25
13 -3400 0.530321 -1803.09
14 -3400 0.505068 -1717.23
15 -3400 0.481017 -1635.46
16 19600 0.458112 8978.986
Present worth -236312
Package L offers the lower present worth
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