Question

20. A firm is considering which of two mechanical devices to install to reduce costs in a particular situation. Both devices cost $1000 and have useful lives of five years and no salvage value. Device A can be expected to result in $300 savings annually. Device B will provide cost saving of $400 the first year but will decline by $50 annually, making the second year saving to $350 and third year savings $300 and so forth. With interest at 7% per year, which device should the firm purchased?

          20. A firm is considering which of two mechanical devices to install to reduce costs in a particular situation. Both devices cost $1000 and have useful lives of five years and no salvage value. Device A can be expected to result in $300 savings annually. Device B will provide cost saving of $400 the first year but will decline by $50 annually, making the second year saving to $350 and third year savings $300 and so forth. With interest at 7% per year, which device should the firm purchased?

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Principles of Economics

Gregory Mankiw 8th Edition

Instant Answer

Solved by Expert Azat Nurmukhametov

08/18/2022

Step 1

For Device A, the cost savings are the same each year, so we can use the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r] where C is the annual cost savings, r is the interest rate, and n is the number of years. PV_A = 300 * [(1 - Show more…

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20. A firm is considering which of two mechanical devices to install to reduce costs in a particular situation. Both devices cost $1000 and have useful lives of five years and no salvage value. Device A can be expected to result in $300 savings annually. Device B will provide cost saving of $400 the first year but will decline by $50 annually, making the second year saving to $350 and third year savings $300 and so forth. With interest at 7% per year, which device should the firm purchased?

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