Homework Answers
For around lake option
First cost = 15 * 5000 = 75000
Maint = 200 * 15 = 3000 per yr
salvage = 3000 * 15 = 45000
annual power loss = 15 * 500 = 7500
annual taxes = 0.02*75000 = 1500
NPW of around lake option = -75000 - (3000 + 7500 + 1500) * (P/A,7%,15) + 45000 * (P/F, 7%,15)
= -75000 - 12000 * 9.107914 + 45000 * 0.362446
= -167984.90
For under lake option
First cost = 5 * 25000 = 125000
Maint = 400 * 5 = 2000 per yr
salvage = 5000 * 5 = 25000
annual power loss = 5 * 500 = 2500
annual taxes = 0.02*125000 = 2500
NPW of under lake option = -125000 - (2000 + 2500 + 2500) * (P/A,7%,15) + 25000 * (P/F, 7%,15)
= -125000 - 7000 * 9.107914 + 25000 * 0.362446
= -179694.20
As present cost of around the lake option is less it should be selected
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