3 Compare the alternatives shown below on the basis of their

3. Compare the alternatives shown below on the basis of their capitalized costs. Use 14% per year. First Cost, $ Annual Operating Cost,S Salvage value, $ Life, years 8,500,000 8,000 5,000 Alternative W 50,000,000 7,000 2,000

Solution

ANSWER:

due to technical problem , cash flow diagrams pic couldn\'t be uploaded , so sorry for the diagram.

1) Alternative u : we need to find the amount through one life cycle.

a = initial investment(a/p,i,n) + annual cost + salvage value(a/f,i,n)

i = 14% and n = 5 years

a = -8,500,000(a/p,14%,5) - 8,000 + 5,000(a/f,14%,5)

a = -8,500,000 * 0.2913 - 8,000 + 5,000 * 0.1513

a = -2,476,050 - 8,000 + 756.5 = -$2,483,294

capitalized cost = a / i = -2,483,294 / 14% = -$17,737,810.7

2) alternative w

a = initial investment(a/p,i,n) + annual cost + salvage value(a/f,i,n)

i = 14% and n = infinity

a = -50,000,000(a/p,14%,infinity) - 7,000 + 2,000(a/f,14%,infinity)

a = -50,000,000 * 0.14 - 7,000 + 2,000 * 0

a = -7,000,000 - 7,000 + 0 = -$7,007,000

capitalized cost = a / i = -7,007,000 / 14% = -$50,050,000

so we select alternative u.