your office block has a central air-conditioning plant.your medical service prov

Question

your office block has a central air-conditioning plant.your medical service provider advised that due to the increasing maintenance cost of the plant, he would have to consider replacing the plant with split units for each office. the replacement with splits units would cost approx. R1000000 and the cost is increasing by 7.5% per year. currently the maintenance cost is approx. R15000 per month for the central plant, and replacing it with split units would reduce the maintenance cost to R5000 per month. accept that there is no escalation in the cost of maintenance. if your opportunity cost 12% per year, motivate if you would replace the A/C plant and if it is the best option to do it now or in 5 year's time

Explanation / Answer

The Cost of Investment year after is increasing @ 7.5% . Hence it is recommended to replace the machine Now.

Total Cost will be.

Cost of the machine-1000000

Savings in cost - 5000x12=60000

Net Investment =940000

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