Question

1)

Lex Luther, the arch enemy of Superman, wants to place a large Kryptonite gun on the top of his secret lair. He believes this will be the most effective method of defense against Superman. He must decide if he should construct his own Kryptonite gun or purchase one from his friend Sinesto. Let i = 9% per year. Cash Flows First Costs, $ Annual operating cost, $/year Salvage, $ Life, years Build Purchase - 120,000 -80,000 -9,000 -20,000 95,000 5,000 0010

2)

Answer 1

1.

AW of build option = -120000 * (A/P, 9%, infinite) - 9000 + 95000 * (A/F, 9%, infinite)

= -120000 * 0.09 - 9000 + 95000 * 0

= -19800

AW of purchase option = -80000 * (A/P, 9%, 10) - 20000 + 5000 * (A/F, 9%, 10)

= -80000 * 0.155820 - 20000 + 5000 * 0.065820

= -32136.51

CC of build option = -19800 / 0.09 = -220000

CC of purchase option = -32136.51 / 0.09 = -357072.29

As the Capitalized cost of Build option is less, it should be selected

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