Question

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 $200,000, an operating cost of $4,500 per quarter, and a salvage value of $30,000 after its 2-year life. Package L has a first cost of $270,000 with a lower operating cost of $2,600 per quarter and an estimated $15,000 salvage value after its 4-year life. Which package offers the lower present worth analysis at an interest rate of 16% per year, compounded quarterly?

The present worth of package K is $______ and that of package L is $ _______

Answer 1

Quarterly interest = 16/4 = 4% per quarter

Present worth of Package K

P+A(P/A,i,n)+F(P/F,i,n)+F2(P/F,i,n)

-200000+4500(P/A,4%,16)-170000(P/F,4%,8)+30000(P/F,4%,16)

-200000+4500(11.6523)-170000(0.73069)+30000(0.533908)

-200000+52435.35-124217.3+16017.24

-255764.711

Present worth of Package L

P+A(P/A,i,n)+F(P/F,i,n)

-270000-2600(P/A,4%,16)+15000(P/F,4%,16)

-270000-2600(11.6523)+15000(0.533908)

-270000-30295.98+8008.62

-292287.36

Package K would be selected as it costs less