Serve a new manufacturing plant

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Reference no: EM131807243

Teléfono Mexico is expanding its facilities to serve a new manufacturing plant. The new plant will require 2000 telephone lines this year, and another 2000 lines after expansion in 10 years. The plant will operate for 30 years.

Option 1 Provide one cable now with capacity to serve 4000 lines. The cable will cost $200,000 and annual maintenance costs will be $15,000.

Option 2 Provide a cable with capacity to serve 2000 lines now and a second cable to serve the other 2000 lines in 10 years. Each cable will cost $150,000 and will have an annual maintenance of $10,000. The telephone cables will last at least 30 years, and the cost of removing the cables is offset by their salvage value.

(a) Which alternative should be selected, assuming a 10% interest rate?

(b) Will your answer to (a) change if the demand for additional lines occurs in 5 years instead of 10 years?

Reference no: EM131807243

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