Reference no: EM132816163
Compare the two scenarios for acquiring a machine for a project for 22 years expected operations, at a company with an internal rate of return of i = 16%. Using Present Worth (Present Cost), find which scenario is better.
Scenario 1. Buy an initial small machine at $13,000, it cost $2,400/year to run for the first 12 years, buy a second larger machine at $26,000 and run it for 10 years at a cost of $4,000/year. There is no salvage value at the end of service for either machine.
My Work:
13,000(P/F, 16%, 12)+2,400(P/A, 16%, 12)+26,000(P/F, 16%, 10)+4,000(P/A, 16%, 10) = 39,885
Scenario 2. Buy a large machine for $36,000 and run it for 22 years at a cost of $1,000/year. At the end of the 22 years, the machine is assumed to have a salvage value of $5,000.
My Work:
36,000+1,000(P/A, 16%, 22)-5,000(P/F, 16%, 22) = 42,201
Not confident that my work is correct. This is the method that we have been using to solve problems like this. Is this the right approach?
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