4 .mework 2 C Option #1-Purchase a new compactor for $30,000. The new compactor

Question

4 .mework 2 C Option #1-Purchase a new compactor for $30,000. The new compactor is expected to last six years and have a salvage value of $5,000. Option #2-Lease a new compactor for $6,000 per year, payable at the beginning of each year. This option has an indefinite lifespan. Option #3-Purchase a used compactor for $16,800. The used compactor is expected to last three years with no salvage value if the annual interest rate is 5%; 8, what is the annual cost of option #1? a. b, what is the annual cost of option #2? c, what is the annual cost of option #37 d. Which alternative should be selected? Use the same scenario as listed before Question #7, but with an interest rate of 10%; a. what is the annual cost of option #1? b, what is the annual cost of option #2? c, what is the annual cost of option #37 d. Which alternative should be selected? 9. 2 of 3

Explanation / Answer

9)

The annual cost of option 1 = $ 30,000 ( A/P , 10% , 6 years ) - $ 5000 ( A/F, 10 % , 6 years)

The annual cost of option 1 =   $ 30,000 x 0.229607 - $ 5000 x 0.129607

The annual cost of option 1 = $ 6,240.18

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b) Annual cost of option 2 = $ 6000

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c) The annual cost of option 3 = $ 16,800 ( A/P , 10% , 3 years )

The annual cost of option 3 = $ 16,800 x 0.402115

The annual cost of option 3 = $6,755.53

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The alternative to be selected is option 2 i.e. leasing because the annual cost is less compared to other alternatives.

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