Hinson’s Homegrown Farms needs a new irrigation system. System one will cost $145,000, have annual maintenance costs of $10,000, and need an overhaul at the end of year six costing $30,000. System two will have first-year maintenance costs of $5000 with increases of $500 each year thereafter. System two would not require an overhaul. Both systems will have no salvage value after 12 years. If Hinson’s cost of capital is 4%, using annual worth analysis determine the maximum Hinson’s should be willing to pay for system two.
Hinson’s Homegrown Farms needs a new irrigation system. System one will cost $145,000, have annual maintenance costs of $10,000, and need an overhaul at the end of year six costing $30,000. System two will have first-year maintenance costs of $5000 with increases of $500 each year thereafter. System two would not require an overhaul. Both systems will have no salvage value after 12 years. If Hinson’s cost of capital is 4%, using annual worth analysis determine the maximum Hinson’s should be willing to pay for system two.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Hinson’s Homegrown Farms needs a new irrigation system. System one will cost $145,000, have annual maintenance costs of $10,000, and need an overhaul at the end of year six costing $30,000. System two will have first-year maintenance costs of $5000 with increases of $500 each year thereafter. System two would not require an overhaul. Both systems will have no salvage value after 12 years. If Hinson’s cost of capital is 4%, using annual worth analysis determine the maximum Hinson’s should be willing to pay for system two.
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