2. A new condensate-recovery system is being considered to replace an antiquated

Question

2. A new condensate-recovery system is being considered to replace an antiquated system at Arun Tech. It is estimated that the new system will cost $600,000 to install now. However, the old antiquated system may be fixed at a cost to last for another two years. If the new system is delayed for another two years, it could be bought and installed at the same cost of $600,000. The company is in a budget squeeze and having problem finding the money now for the new system and is therefore considering a two year delay for the installation of the new system. If money is worth 15%, how much can the company afford to spend to fix the old system to be functional for two more years? 0 9 B) $193,200 C) $146,340 D) $222,500

Explanation / Answer

The money that can be spend on the repair of the old system = 600,000 which is being spent today - Present value of 600,000 to be spend after 2 years

= 600,000 - 600,000/(1.15^2)

= 600,000 - 453,686

= 146,314

We are just delaying the 600,000 payment for 2 years.

Hence option C should be correct.

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