Question

A floor is being replaced. In total, this area is about 3,000 m². Two materials are available to use, either linoleum or wood flooring.

The initial investment in linoleum flooring is 350 $/m², while the wood flooring is 570 $/m².

Linoleum flooring: Lifetime: 24 years Cleaning: $200 /year per m²

Wood flooring: Sanding and varnishing every other year: 110 $/m². The floor can only be sanded twice, after which it needs to be replaced. The lifetime of the floor is thus 6 years. Cleaning: 280 $/year per m²

Based on cost/revenues, which option should be chosen? Be sure to state your reason why the choice should be made.

In the subsequent calculations, a discount rate of 4% per year should be used.

(I have created and attached the cash flow diagrams to help)

0 23 24 Linoleunm $600k $600k $600k $600k $600k $1,050,000 5 0 4 6 Wood $840k $1.17M $840k $1.17M $840k $840k $1,710,000

Answer 1

i = 4%

EUAC of lionleum = 1050000*(A/P,4%,24) + 600000

= 1050000 * 0.065587 + 600000 = 668866.35

EUAC of wood = 1710000*(A/P,4%,6) + 840000 + (1170000-840000)*(P/F,4%, 2)*(A/P,4%,6) + (1170000-840000)*(P/F,4%,4)*(A/P,4%,6)

= 1710000*(A/P,4%,6) + 840000 + 330000*(P/F,4%, 2)*(A/P,4%,6) + 330000*(P/F,4%,4)*(A/P,4%,6)

= 1710000*0.190762 + 840000 + 330000*0.924556*0.190762 + 330000*0.854804*0.190762

= 1278216.33

As EUAC of linoleum is less it should be selected