(a):
Calculate annual worth in constant dollar.
(a):
Explanation of Solution
Machine A: First cost (FC) is $150,000. Maintenance and operating cost (MO) is $70,000. Salvage value (SV) is $40,000. Time period (n) is 5.
Machine B: First cost (FC) is $1,025,000. Maintenance and operating cost (MO) is $5,000. Salvage value (SV) is $2,00,000. Time period (n) is infinitive.
Real return (i) is 12%.
The annual worth of Machine A (AWA) can be calculated as follows:
The annual worth is -$105,315.
The annual worth of Machine B (AWBA) can be calculated as follows:
The annual worth is -$128,000. Since the annual worth of the cost is less for Machine A, select Machine A.
(b):
Calculate annual worth in current dollars.
(b):
Explanation of Solution
Inflation adjusted interest rate (if) can be calculated as follows:
Inflation adjusted interest rate is 19.84%.
The annual worth of machine A (AWA) can be calculated as follows:
The annual worth is -$114,588.
The annual worth of Machine B (AWBA) can be calculated as follows:
The annual worth is -$208,360. Since the annual worth of the cost is less for Machine A, select Machine A.
Annual worth can be calculated using the spreadsheet as follows:
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Chapter 14 Solutions
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