Question

Y 0.83 points Compare the alternatives below on the basis of their capitalized costs with adjustments made for inflation. Use i=12% per year and f= 3.8% per year. Alternative х First cost, $ -16,000,000 -14,500,000 AOC, $ per year -25,000 -10.000 Salvage value, $ 105,000 82,000 Life, years 10 eBook Hint Print The capitalized cost for alternative X is $ References The capitalized Click to select) IS Select alternativex

Answer 1

		i=discount rate =12%=0.12		8.2
		f=inflation rate =3.8%=0.038
		r=Inflation adjusted discount rate
		1+r=(1+i)/(1+f)=(1+0.12)/(1+0.038)=	1.0790
		Inflation adjusted discount rate =r=	0.0790	7.90%
		ALTERNATIVE X
		Life =Infinity
	a	First Cost	($16,000,000)
	b	Present Value of AOC=-25000/0.0790	-$316,463
	c	Present Value of salvage	$0
	d=a+b+c	Capitalized Cost of Alternative X	($16,316,463)
		ALTERNATIVE Y
		Life =10 years
	a	First Cost	($14,500,000)
		Present Value Factor	6.740511	( Using PV function of excel with Rate =0.0790,Nper=10, Pmt=-1)
	b	Present Value of AOC=-10000*6.740511	-$67,405
	c	Present Value of salvage	$38,336	(82000/(1.079^10)
	d=a+b+c	Capitalized Cost of Alternative Y	($14,529,069)
		SELECT ALTERNATIVE : Y
					fox =PV(G8,10,-1) G20 A В C D E G Н K L M 3 i-discount rate -12%-0.12 4 8.2 fEinflation rate =3.8%=0.038 5 r=Inflation adjusted discount rate 6 1+r-(1+i)/(1+f)=(1+0.12)/(1+0.038) = Inflation adjusted discount rate -r 1.0790 7 7.90% 8 0.0790 9 ALTERNATIVE X 10 Life =Infinity 11 ($16,000,000) -$316,463 First Cost 12 Present Value of AOC- 25000/0.0790 13 Present Value of salvage $0 14 ($16,316,463) Capitalized Cost of Alternative X 15 16 17 ALTERNATIVE Y Life-10 years 18 ($14,500,000) 19 First Cost Present Value Factor Using PV function of excel with Rate-0.0790,Nper-10, Pmt--1) 20 6.740511 orooo to o1no