A mining company need to decide which of the equipment models to use in a project that will last for 4 years. The company required return on investment is 5%. Each model can be sold for a salvage value and replaced by an identical machine with the same cost and cash flow as many times as needed and at any given period. The purchasing cost, operational cost and salvage value of the two models as follows: • Model A costs $15,000 and requires annual operational cost of $2,000. The model operable for 2 years and at the end of the year 2, its estimated salvage value is $1,500 • Model B costs $30,000 and requires annual operational cost of $1,000. The model operable for 6 years and at the end of the year 4, its estimated salvage value is $2,500 Model A Model B -15,000 -30,000 1 -2,000 -1,000 2 -2,000 + 1,500 -1,000 -1,000 4 -1,000+ 2,500 Which model the company should use? (Select the correct statement) O Select Model A because it will save around $2,182 in present worth over the required service period O Select Model B because it will save around $1,613 in present worth over the required service period O Almost Both models have the same present worth over the required service period and the difference between is less than $20 Select Model B because it last for 4 years and the project life is 4 years while Model A life time is 2 years
A mining company need to decide which of the equipment models to use in a project that will last for 4 years. The company required return on investment is 5%. Each model can be sold for a salvage value and replaced by an identical machine with the same cost and cash flow as many times as needed and at any given period. The purchasing cost, operational cost and salvage value of the two models as follows: • Model A costs $15,000 and requires annual operational cost of $2,000. The model operable for 2 years and at the end of the year 2, its estimated salvage value is $1,500 • Model B costs $30,000 and requires annual operational cost of $1,000. The model operable for 6 years and at the end of the year 4, its estimated salvage value is $2,500 Model A Model B -15,000 -30,000 1 -2,000 -1,000 2 -2,000 + 1,500 -1,000 -1,000 4 -1,000+ 2,500 Which model the company should use? (Select the correct statement) O Select Model A because it will save around $2,182 in present worth over the required service period O Select Model B because it will save around $1,613 in present worth over the required service period O Almost Both models have the same present worth over the required service period and the difference between is less than $20 Select Model B because it last for 4 years and the project life is 4 years while Model A life time is 2 years
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
Transcribed Image Text:A mining company need to decide which of the equipment models to use in a project that will last for 4 years. The company required return on investment is 5%.
Each model can be sold for a salvage value and replaced
period. The purchasing cost, operational cost and salvage value of the two models as follows:
an identical machine with the same cost and cash flow as many times as needed and at any given
• Model A costs $15,000 and requires annual operational cost of $2,000. The model operable for 2 years and at the end of the year 2, its estimated
salvage value is $1,500.
• Model B costs $30,000 and requires annual operational cost of $1,000. The model operable for 6 years and at the end of the year 4, its estimated
salvage value is $2,500.
Model A
Model B
-15,000
-30,000
1
-2,000
-1,000
2
-2,000 + 1,500
-1,000
3
-1.000
4
-1,000+ 2,500
Which model the company should use? (Select the correct statement)
O Select Model A because it will save around $2,182 in present worth over the required service period
O Select Model B because it will save around $1,613 in present worth over the required service period
O Almost Both models have the same present worth over the required service period and the difference between is less than $20
Select Model B because it last for 4 years and the project life is 4 years while Model A life time is 2 years
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education