You and your partner have become very interested in cross-country motorcycle rac
ID: 1102718 • Letter: Y
Question
You and your partner have become very interested in cross-country motorcycle racing and wish to purchase entry-level equipment. You have identified two alternative sets of equipment and gear. Package K has a first cost of $130,000, an operating cost of $5,500 per quarter, and a salvage value of $60,000 after its 2-year life. Package L has a first cost of $190,000 with a lower operating cost of $2,300 per quarter and an estimated $13,000 salvage value after its 4-year life. Which package offers the lower present worth analysis at an interest rate of 12% per year, compounded quarterly?
The present worth of package K is $ and that of package L is $ .
offers the lower present worth analysis
Explanation / Answer
interest rate = 12% (compounded quarterly)
quarterly interest rate = 12%/4 = 3%
Package K:
time period = 8 quarters or 2 years
The time period would need to be extended to 4 years to compare these options (costs remain the same)
PW = -130000 -5500/1.03 -5500/1.032 -5500/1.033 .....-5500/1.038 + 60000/1.038 -130000/1.038 -5500/1.039 - ... + 60000/1.0316
PW = - $216954.7
Package L:
time period = 16 quarters or 4 years
PW = -190000 -2300/1.03 -2300/1.032 -2300/1.033 .....-2300/1.0316 + 13000/1.0316
PW = - $210789.2
Package L offers the lower cost using PW analysis.
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