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Suppose SUNY Oswego needs to purchase a new Central AC for the Rich Hall. There are...

Suppose SUNY Oswego needs to purchase a new Central AC for the Rich Hall. There are two choices, the first system costs $50,000 and is expected to last 10 years, and the second system costs $72,000 and is expected to last 15 years. Assume that the opportunity cost of capital is 10 percent. Which air-conditioning system should SUNY Oswego purchase?

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Answer #1

Annual cost of first system:

= $ 50,000 / PVAF of 10% for 10 years

= $ 8,137.27 Approximately

Annual cost of second system:

= $ 72,000 / PVAF of 10% for 15 years

= $ 9,466.11 Approximately

Since the cost of first system is lower than the cost of second sysytem, hence first system should be purchased.

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