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. n Model A Model B 0 -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?
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. n Model A Model B 0 -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?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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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
-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.
|
n |
Model A |
Model B |
|
0 |
-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?
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