System A costs $150,000 to purchase and install and has a life of 8 years, with no salvage value. It will require an overhaul in four years at a cost of $35,000. Annual operating and maintenance costs (O&M) will be $10,000 per year for the first four years and will increase by $6000 each year for the remaining life (i.e., O&M will cost $16,000 in year 5, $22,000 in year 6, $28,000 in year 7, and $34,000 in year 8). System B costs $200,000 to purchase and install and has a life of 15 years, and a salvage value of $15,000. It will require an overhaul every 5 years at a cost of $30,000 for each overhaul. The O&M costs will be a constant $15,000 per year. Assuming an effective interest rate of 6% per year, use an annual worth analysis to determine which alternative would be recommended.
System A costs $150,000 to purchase and install and has a life of 8 years, with no salvage value. It will require an overhaul in four years at a cost of $35,000. Annual operating and maintenance costs (O&M) will be $10,000 per year for the first four years and will increase by $6000 each year for the remaining life (i.e., O&M will cost $16,000 in year 5, $22,000 in year 6, $28,000 in year 7, and $34,000 in year 8).
System B costs $200,000 to purchase and install and has a life of 15 years, and a salvage value of $15,000. It will require an overhaul every 5 years at a cost of $30,000 for each overhaul. The O&M costs will be a constant $15,000 per year.
Assuming an effective interest rate of 6% per year, use an annual worth analysis to determine which alternative would be recommended.
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