Question

3- As part of a mine feasibility study of mining a surface orebody, you determine that two pieces of equipment could be used interchangeably to achieve the desired results. Equipment A has a cost of $425,000 and an annual expected operating cost of $23,250 for 10 years. Equipment B has a cost of $175,000 and an expected annual operating cost of $35,475 for 5 years and then the piece of equipment is replaceable at an equivalent amount and operating cost. Based on this information, an annual interest rate of 3.58% and assuming no salvage value, which piece of equipment would you recommend? (Hint: Calculate the annual equivalent cost of each equipment) (8 points) (USING EQUATIONS)

B) Using the information given in problem 3 above, which piece of equipment would you recommend if equipment A has an expected salvage value of $25000 after 10 years and equipment B has a salvage value of $7,000 after 5 years?

Answer 1

In the first case Equipment B is recommended over Equipment A and in the second case Equipment A is recommended over Equipment B.