A firm desires to determine the most economic equipment-overhauling schedule alt

ID: 1187441 • Letter: A

Question

A firm desires to determine the most economic equipment-overhauling schedule

alternative to provide for service for the next nine years of operation. The firmâ€™s real

MARR is 8% per year, and the inflation rate is estimated at 7% per year. The following

are alternatives with all the costs expressed in real dollars:

a. Completely overhaul for $10,000 now

b. A major overhaul for $7,000 now that can be expected to provide six years of service

and then a minor overhaul costing $5,000 at the end of six years.

c. Aminor overhaul costing $5,000 now as well as at the end of three years and six

years from now.

MARR=8%

Inflation=7%

return(R)=8-7=1%

a)TC=10000*(1+R)^6=10615

b)TC=7000*(1+R)^6+5000=12403

c)TC=5000*(1+R)^6+5000*(1+R)^3+5000=15459

so a is better option for the company

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.