Test/Quiz Number 1 Additional Problenm A project engineer must start up a new fa

Question

Test/Quiz Number 1 Additional Problenm A project engineer must start up a new facility in a city where a 5-year contract has been signed to construct several new buildings. There are three lease options available, with a first cost, annual lease cost, and a deposit-return estimate shown as well. The MARR is 10% per year First Cost (S) Annual Lease cost ($ per year) Deposit return ($) Lease term, years Location A 20,000 4,000 4,000 Location B 15,000 4,500 1,000 Location C 12,000 5,500 2,000 a. All projects are evaluated over a 5-year period. If the deposit returns are not expected to change, which location should be selected?

Explanation / Answer

This question can be answered by comparing the final values of money that has to be paid.

LOCATION A

The total cost paid at the end of 5 years= First Cost + Annual Lease Cost x Number of years - Deposit Return

=20,000 + 4,000 x 5 - 4000 = $36,000

LOCATION B

The total cost paid at the end of 5 years= First Cost + Annual Lease Cost x Number of years - Deposit Return

=15,000 + 4,500 x 5 - 1000 = $36,500

LOCATION C

The total cost paid at the end of 5 years= First Cost + Annual Lease Cost x Number of years - Deposit Return

=12,000 + 5,500 x 5 - 2000 = $37,500

i.e., Even though it has a high First cost, Location A is economical in the long run.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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