Question

# Two types of power converters are being considered for a specific application. You want to make...

Two types of power converters are being considered for a specific application. You want to make a comparison using a 15 percent interest rate and you have the following information:

 Alternative Alpha Omega Purchase Price 10,000 20,000 Estimate useful life 5 years 9 years Salvage Value 1,000 5,000 Anual operation cost 2,600 1,300

a. Determine the annual equivalent cost of both alternatives.

b. Using a useful life of 6 years, determine the present value of both alternatives if the residual value of alpha after one year of use is \$ 8,000 and the residual value of Omega after 6 years of use is \$ 8,500.

A.

For Alpha alternative:

Present value of total cost = 10000 + 2600*(1-1/1.15^5)/.15   - 1000/1.15^5

Present value of total cost = \$18218.43

Let, uniform annual cost = EUAC1

Then,

18218.43 = EUAC1*(1-1/1.15^5)/.15

EUAC1 = 18218.43/3.3522

EUAC1 = \$5434.77

For Omega alternative:

Present value of total cost = 20000 + 1300*(1-1/1.15^9)/.15   - 5000/1.15^9

Present value of total cost = \$24781.75

Let, uniform annual cost = EUAC2

Then,

24781.75 = EUAC2*(1-1/1.15^9)/.15

EUAC2 = 24781.75/4.7716

EUAC2 = \$5193.59

B.

Present value of Alpha = 10000 + 2600/1.15 â€“ 8000/1.15

Present value of Alpha = \$5304.35 (-ve)

Present value of Omega = 20000 + 1300*(1-1/1.15^6)/.15   - 8500/1.15^6

Present value of Omega = \$21245.04 (-ve)

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