First Cost O & M Cost/year Salvage Life A$14M $3.5M $2M 8 years B $22M $3M $7.5M 16 years Which equipment is preferred if the firm's interest rate is 15%? In PW terms, how great is the difference?
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Step 1
To calculate the PW, we need to discount the costs and salvage value of each option to their present value using the interest rate of 15%. For Option A: PW(A) = -14M + (3.5M/1.15) + (2M/1.15^8) = -14M + 3.04M + 0.79M = -10.17M For Option B: PW(B) Show more…
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Which equipment is preferred if the firm's interest rate is 15%? In PW terms, how great is the difference? Alternative "A" Alternative "B" First cost $45,000 $35,000 Annual O&M $3,900 $4,200 Salvage value $0 $5,000 Overhaul (Year 6) $10,000 Not required Life 10 years 5 years
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