A competing company is considering the same Option Y above. Option Y (The Crush

Question

A competing company is considering the same Option Y above. Option Y (The Crush Master Elite) would cost $18k initially, and $5k every year for routine operation and maintenance. The seller of this unit estimates a useful life of 10 years. The unit has no salvage value. The company is also considering a new option, Option Z (The Rubble Maker), which would cost $8.1k initially and have a cost of $1.5k every other year beginning on year two. Half way through its lifespan it has a single additional cost of $8.5k. The unit has a lifespan of 16 years and has no salvage value. i = 6%. Perform a comparison of the costs of these two options. Provide as your answer the decimal ratio of the cost of option Z to the cost of option Y, Cz/Cy (e.g., if you determine the cost of Option Z to be half of the cost of Option Y, enter 0.5).

Explanation / Answer

Cost of Option Y for 10 years is $54800

Cost of Option Y for 16 years is 54800*1.6 = $87680

Cost of Option Z for 16 years is $20792

Cz/Cy = 20792/87680 = 0.237

Year Option Y PV of Y Option Z PV of Z 0 -18000 -18000.00 -8100 -8100 1 -5000 -4716.98 0 2 -5000 -4449.98 -1500 -1334.99 3 -5000 -4198.10 0 4 -5000 -3960.47 -1500 -1188.14 5 -5000 -3736.29 0 6 -5000 -3524.80 -1500 -1057.44 7 -5000 -3325.29 0 8 -5000 -3137.06 -1500 -941.119 8 0.00 -8500 -5333.01 9 -5000 -2959.49 0 10 -5000 -2791.97 -1500 -837.592 11 0 12 -1500 -745.454 13 0 14 -1500 -663.451 15 0 16 -1500 -590.469 Total -68000 -54800 -28600 -20792

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