Two methods can be used to produce expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $30,000 in year 1, increasing by $4000 each year. Method B will have a first cost of $120,000, an operating cost of $8000 in year 1, increasing by $6500 each year, and a $40,000 salvage value after its 3-year life. At an interest rate of 12% per year, which method should be used on the basis of a present worth analysis?
Two methods can be used to produce expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $30,000 in year 1, increasing by $4000 each year. Method B will have a first cost of $120,000, an operating cost of $8000 in year 1, increasing by $6500 each year, and a $40,000 salvage value after its 3-year life. At an interest rate of 12% per year, which method should be used on the basis of a present worth analysis?
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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Two methods can be used to produce expansion anchors.
Method A costs $80,000 initially and will
have a $15,000 salvage value after 3 years. The operating
cost with this method will be $30,000 in year
1, increasing by $4000 each year. Method B will
have a first cost of $120,000, an operating cost of
$8000 in year 1, increasing by $6500 each year, and
a $40,000 salvage value after its 3-year life. At an
interest rate of 12% per year, which method should
be used on the basis of a present worth analysis?
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