5 Going Broke County is using a 10 annual interest rate to d

5. Going Broke County is using a 10% annual interest rate to decide if it should buy Snowplow A or Snowplow B. Snowplow B Snowplow A S300,000 Initial Cost 00,000 35,000 $ 10,000 1 $45,000 nnual Benefits Salvage Value What should Going Broke County do? Justify your answer.

Solution

Since both Snowplow have same life, e use Present Worth (PW) of net benefits (= Annual benefit - Annual maintenance) method as follows.

PW, Snowplow A ($) = - 300,000 + (150,000 - 45,000) x P/A(10%, 10) = - 300,000 + 105,000 x 6.1446**

= - 300,000 + 645,183 = 345,183

PW, Snowplow B ($) = - 400,000 + (200,000 - 35,000) x P/A(10%, 10) + 10,000 x P/F(10%, 10)

= - 400,000 + 165,000 x 6.1446** + 10,000 x 0.3855** = - 400,000 + 1,013,859 + 3,855 = 617,714

Since Snowplow B has higher PW, this should be selected.

**From P/A and P/F factor tables