Little Rhody Manufacturing needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs $70,000 and is expected to last 6 years, and the second system costs $102,000 and is expected to last 9 years. Assume that the opportunity cost of capital is 12 percent. Which air-conditioning system should you purchase? Show your work. Hint: There are two ways to solve this. The hard way: Use formula for EAC The easy way: TMV exercise and solve for PMT assuming annual P/Y. Whichever has the lower PMT, go with that system. PV = cost. FV = 0, I/Y = 12%, N = Number of years. P/Y = 1
Little Rhody Manufacturing needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs $70,000 and is expected to last 6 years, and the second system costs $102,000 and is expected to last 9 years. Assume that the opportunity cost of capital is 12 percent. Which air-conditioning system should you purchase? Show your work. Hint: There are two ways to solve this. The hard way: Use formula for EAC The easy way: TMV exercise and solve for PMT assuming annual P/Y. Whichever has the lower PMT, go with that system. PV = cost. FV = 0, I/Y = 12%, N = Number of years. P/Y = 1
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...
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Little Rhody Manufacturing needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs $70,000 and is expected to last 6 years, and the second system costs $102,000 and is expected to last 9 years. Assume that the opportunity cost of capital is 12 percent. Which air-conditioning system should you purchase? Show your work.
Hint: There are two ways to solve this.
The hard way: Use formula for EAC
The easy way: TMV exercise and solve for PMT assuming annual P/Y.
Whichever has the lower PMT, go with that system. PV = cost. FV = 0, I/Y = 12%, N = Number of years. P/Y = 1
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