Question

National Homebuilders, Inc., plans to purchase new cut-and-finish equipment. Two manufacturers offered the estimates below. If MARR=15%, the equation for computing the present worth of vendor B is

	Vendor A	Vendor B
First Cost, $	-15,000	-18000
Annual Cost, $ per year	-3500	-3100
Salvage Value	1000	2000
Life, Years	6	9

Option:

A) PW(B)=18,000(P/F, 15%, 9)-18,000(P/F, 15%, 18)-3,100(P/A, 15%, 18)+2,000(P/F, 15%, 9)+2,000(P/F, 15%, 18)

B) PW(B)=-18,000-18,000(P/F, 15%, 9)-3,100(P/A, 15%, 18)+2,000(P/F, 15%, 9)

C) PW(B)=-18,000-18,000(P/F, 15%, 9)-18,000(P/F, 15%, 18)-3,100(P/A, 15%, 18)+2,000(P/F, 15%, 9)+2,000(P/F, 15%, 18)

D.) PW(B)=-18,000-18,000(P/F, 15%, 9)-3,100(P/A, 15%, 18)+2,000(P/F, 15%, 9)+2,000(P/F, 15%, 18)

Answer 1

The life period of the two provided options is not same.

In case of options with different life periods, the preset worth is calculated using LCM method.

The life period of equipment from Vendor A is 6 years

The life period of equipment from Vendor B is 9 years.

The LCM of 6 and 9 is 18.

Thus, 18 years would be used as a study period.

This implies that equipment from Vendor B will be replaced by similar equipment after 9 years.

Calculate the present worth of Vendor B -

PW(B) = -First cost - Annual cost(P/A, i, n) - [First cost - Salvage value](P/F, i, n) + Salvage value(P/F, i, n)

PW(B) = -18,000 - 3,100(P/A, 15%, 18) - [18,000 - 2,000](P/F, 15%, 9) + 2,000(P/F, 15%, 18)

PW(B) = -18,000 - 3,100(P/A, 15%, 18) - 18,000(P/F, 15%, 9) + 2,000(P/F, 15%, 9) + 2,000(P/F, 15%, 18)

Thus,

The correct answer is the option (D).