Ross Inc is considering two mutually exclusive equipment alternatives to increas

Question

Ross Inc is considering two mutually exclusive equipment alternatives to increase its production volume. The respective financial estimates for each alternative are as follows.

Data

Equipment A

Equipment B

Initial Cost

$50K

$106.31K

EUAB

$16K

$24K

Salvage Value

$9K

$0

If the useful life of equipment A is 4 years, with a MARR of 10%, the useful life in years of equipment B that makes both the equipment equally desirable is most nearly equal to:

A.

4

B.

7

C.

5

D.

6

Data

Equipment A

Equipment B

Initial Cost

$50K

$106.31K

EUAB

$16K

$24K

Salvage Value

$9K

$0

Explanation / Answer

for both the equipment equally desirable, NPV of both should be equal , hence

as n=4 , for A and r=10% so

=> -50 +16/(1.1)^1+16/(1.1)^2+16/(1.1)^3+16/(1.1)^4 +9/(1.1)^4= -106.31 +24/(1.1)+24/(1.1)^2+-----+24/(1.1)^n

=> solving for n, we get n= 7 years

so answer is B

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