TestQuiz Number 1 Additional Problenm A project engineer mus

Test/Quiz Number 1 Additional Problenm A project engineer must start up a new facility in a city where a 5-year contract has been signed to construct several new buildings. There are three lease options available, with a first cost, annual lease cost, and a deposit-return estimate shown as well. The MARR is 10% per year First Cost (S) Annual Lease cost ($ per year) Deposit return ($) Lease term, years Location A 20,000 4,000 4,000 Location B 15,000 4,500 1,000 Location C 12,000 5,500 2,000 a. All projects are evaluated over a 5-year period. If the deposit returns are not expected to change, which location should be selected?

Solution

This question can be answered by comparing the final values of money that has to be paid.

LOCATION A

The total cost paid at the end of 5 years= First Cost + Annual Lease Cost x Number of years - Deposit Return

=20,000 + 4,000 x 5 - 4000 = $36,000

LOCATION B

The total cost paid at the end of 5 years= First Cost + Annual Lease Cost x Number of years - Deposit Return

=15,000 + 4,500 x 5 - 1000 = $36,500

LOCATION C

The total cost paid at the end of 5 years= First Cost + Annual Lease Cost x Number of years - Deposit Return

=12,000 + 5,500 x 5 - 2000 = $37,500

i.e., Even though it has a high First cost, Location A is economical in the long run.