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Many valves are required in a certain pipeline that carries a corrosive chemical. In the past, cast iron valves have always been used and have required replacement every 2 years. Now valves of two corrosion-resistant alloys, A and B are available.
Estimates of installed first costs, lives and salvage values for these three types of valve are as follows:
Cast Iron
Alloy A
Alloy B
First cost
$ 2,000
$ 4,000
$ 6,000
Salvage value
zero
$1,000
Life
2 years
5 years
10 years
The only differences in annual disbursements for the three types of valve are in disbursements for income taxes. Income tax for each case will be 2.5% of the first cost.
Problem a) Compare different alternatives based on present worth (PW), annual worth (AW), and future worth (FW) criterions, and explain your decision accordingly. ( @MARR of 8% per year)
Problem b) If the stipulated after-tax i* is 8%, which type of valve do you recommend? Would your answer be changed if the stipulated after-tax i* should be 12 %? Explain your reasoning
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