A utility company is considering the following plans to provide certain service required by the present demand and the perspective growth of demand for the coming 18 years Plan R required immediate investment of P500,000 in property that has an estimated life of 18 years and with 20% terminal salvage value. Annual disbursements for operation and maintenance will be P50,000. Annual property taxes will be 2% of first cost. Plan S requires an immediate investment of P300,000 in property that has an estimated life of 18 years with 20% terminal salvage value. Annual disbursements for the operation and maintenance during the first 6 years will be P40,000. After 6 years, an additional investment of P400,000 will be required in property having an estimated life of 12 years with 40% terminal salvage value. After this additional property is installed, annual disbursement for operation and maintenance of the combined property will be P60,000. Annual property taxes will be 2% of the first cost of property in service at any time. Money is worth 12%. What would you recommend?
A utility company is considering the following plans to provide certain service required by the present demand and the perspective growth of demand for the coming 18 years Plan R required immediate investment of P500,000 in property that has an estimated life of 18 years and with 20% terminal salvage value. Annual disbursements for operation and maintenance will be P50,000. Annual property taxes will be 2% of first cost. Plan S requires an immediate investment of P300,000 in property that has an estimated life of 18 years with 20% terminal salvage value. Annual disbursements for the operation and maintenance during the first 6 years will be P40,000. After 6 years, an additional investment of P400,000 will be required in property having an estimated life of 12 years with 40% terminal salvage value. After this additional property is installed, annual disbursement for operation and maintenance of the combined property will be P60,000. Annual property taxes will be 2% of the first cost of property in service at any time. Money is worth 12%. What would you recommend?
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
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Transcribed Image Text:6. A utility company is considering the following plans to provide certain service required
by the present demand and the perspective growth of demand for the coming 18 years
Plan R required immediate investment of P500,000 in property that has an estimated
life of 18 years and with 20% terminal salvage value. Annual disbursements for
operation and maintenance will be P50,000. Annual property taxes will be 2% of first
cost.
Plan S requires an immediate investment of P300,000 in property that has an
estimated life of 18 years with 20% terminal salvage value. Annual disbursements for
the operation and maintenance during the first 6 years will be P40,000. After 6 years, an
additional investment of P400,000 will be required in property having an estimated life
of 12 years with 40% terminal salvage value. After this additional property is installed,
annual disbursement for operation and maintenance of the combined property will be
P60,000. Annual property taxes will be 2% of the first cost of property in service at any
time. Money is worth 12%. What would you recommend?
Ans. Plan S.
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