Question

04.05-PR002 Video Solution Video Solution Two incinerators are being considered by a waste management company. Design A has an initial cost of $2,500,000, has annual operating and maintenance costs of $800,000, and requires overhauls every 5 years at a cost of $1,250,000. Design B is more sophisticated, including computer controls; it has an initial cost of $5,750,000, has annual operating and maintenance costs of $600,000, and requires overhauls every 10 years at a cost of $3,000,000. Using a 5%/year interest rate, determine the capitalized cont for each design and recommend which should be chosen. V Answer A: TOTAL CC = $2,500,000+ $16,000,000+ $4,524,369.95 = $23,024,369.95 B: TOTAL CC = $5,750,000+ $12,000,000+ $4,770,274.50 = $22,520,274.50 DESIGN B IS PREFERRED

Answer 1

ANSWER:

DESIGN A:

CC = INITIAL COST + ANNUAL OPERATING AND MAINTENANCE COST / I + OVERHAUL COST(A/F,I,N) / I

CC = 2,500,000 + 800,000 / 5% + 1,250,000(A/F,5%,5) / 5%

CC = 2,500,000 + 16,000,000 + 1,250,000 * 0.181 / 0.05

CC = 18,500,000 + 226,818.5 / 0.05

CC = 18,500,000 + 4,524,369.95

CC = 23,024,369.95

DESIGN B:

CC = INITIAL COST + ANNUAL OPERATING AND MAINTENANCE COST / I + OVERHAUL COST(A/F,I,N) / I

CC = 5,750,000 + 600,000 / 5% + 3,000,000(A/F,5%,10) / 5%

CC = 5,750,000 + 12,000,000 + 3,000,000 * 0.0795 / 0.05

CC = 17,750,000 + 238,513.72 / 0.05

CC = 18,500,000 + 4,770,274.50

CC = 22,520,274.50

DESIGN B IS PREFERRED.