(D) Your co running a semiconductor pr of 10 years. System 2 costs $75,000 and h
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Question
(D) Your co running a semiconductor pr of 10 years. System 2 costs $75,000 and has a useful life of 5 years. mpany is choosing between two types of high voltage power supplies for ocess. System 1 costs $125,000 and has a useful life You need to run your production line for 10 years. Use the annual worth (AW) method of calculation and the repeatability assumption to determine which investment has the lower cost. Note: you will need to buy System 2 twice in the 8-year time period. You MARR 15% Answer Box:Explanation / Answer
System 1
Initial cost = 125000
Life = 10 years
Hence Annual worth of capital expenditure = 125000*(A/P,15%,10)
As per compound interest tables, we find the A/P 15%,10 to be 0.1993
Annual worth = 125000*0.1993 = $24,912
System 2
Initial cost = 75000
Life = 5 years
Hence we will buy system 2 twice, one in time 0, other at the end of time 5
First we compute the total present value of the investment which is
PW =75000+ 75000*(P/F, 15%,5)
PW = 75000+ 75000*0.4972
= 112290
Annual worth = PW * (A/P,15%,10)
= 112290* 0.1993
= $22,379.40
Since the annual cost of System 2 is lower than that of system 1, the company should buy system 2.
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