Question

4. Which equipment is preferred if the firm’s interest rate is 9%? In PW terms how...

4. Which equipment is preferred if the firm’s interest rate is 9%? In PW terms how great is the difference?

Alternative: Equipment A Equipment B

First Cost: $55,000 $25,000

Annual O & M 3,900 4,200

Salvage Value 0 5000

Overhaul (Year 6) 10000 Not required

Life, in years. 10 5

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Answer #1

i = 9%,

The present worth analysis will be carried out for 10 (LCM of 10 & 5)

PW of Equipment A = -55000 -3900*(P/A,9%,10)-10000*(P/F,9%,6)

= -55000 -3900*6.417657 -10000*0.596267

= -85991.54

Equipment B will be reinvested in EOY 5 and csh flow will be repeated from EOY 6 to EOY10

PW of Equipment B = -25000 - 4200*(P/A,9%,10) + 5000*(P/F,9%,5) - 25000*(P/F,9%,5) + 5000*(P/F,9%,10)

= -25000 - 4200*6.417657 - 20000*0.649931 + 5000*0.422410

= -62840.73

Equipment B should be seleced as it has less present cost by 23150.81 as compared to equipment A

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