The production manager on the Ofon Phase 2 offshore platform operated by Total S.A. must purchase specialized environmental equipment or an equivalent service. The first cost is $250,000 with an AOC of $76,000. The manager has let it be known that he does not care about the salvage value because he thinks it will make no difference in the decision-making process. His supervisor estimates the salvage might be as high as $100,000 or as low as $10,000 in 3 years, at which time the equipment will be unnecessary. Alternatively, a subcontractor can provide the service for $215,000 per year. The total offshore project MARR is 13% per year. Determine if the decision to buy the equipment is sensitive to the salvage value. The annual worth of high salvage value is $ . The annual worth of low salvage value is $ .
The production manager on the Ofon Phase 2 offshore platform operated by Total S.A. must purchase specialized environmental equipment or an equivalent service. The first cost is $250,000 with an AOC of $76,000. The manager has let it be known that he does not care about the salvage value because he thinks it will make no difference in the decision-making process. His supervisor estimates the salvage might be as high as $100,000 or as low as $10,000 in 3 years, at which time the equipment will be unnecessary. Alternatively, a subcontractor can provide the service for $215,000 per year. The total offshore project MARR is 13% per year. Determine if the decision to buy the equipment is sensitive to the salvage value.
The annual worth of high salvage value is $ .
The annual worth of low salvage value is $ .
Decision is _____ to salvage value. (Sensitive/ Not Sensitive)
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