Question

We need to purchase construction equipment. We have the choice of purchasing:

• Item A, which has an initial cost of $75,000, an annual fuel cost of $ 6,000/year, annual maintenance cost of $2,000 at the end of the first year that increase thereafter by $200 per year and a salvage value of $10,000 at the end of its 8-year life, and

• Item B, which has an initial cost of $100,000, an annual fuel cost of $ 5,500/year, annual maintenance cost of $2,000 at the end of the first year that increase thereafter by 5 percent per year and a salvage value of $25,000 at the end of its 12-year life.

The least common multiple of the useful lives of these alternatives is 24 years. Evaluate the alternatives using an interest rate of 8 percent, compounded annually.

(a).(1 pt.) For the first 8-year cycle, what is the net present worth of Item A ($)?

(b).(1 pt.) For the first 12-year cycle, what is the net present worth of Item B ($)?

(c).(3 pt.) Suppose that the present worth of Item A for one 8-year life time is $116,767 and that the present worth of Item B for one 12-year life time is $148,158 (these are not the correct answers to parts (a) and (b)).

     1. What is the present value of Project A for the planning horizon ($)?

     2. What is the present value of Project B for the planning horizon ($)?

     3. Which project is preferred (A or B)?

Answer 1