2. A new condensate-recovery system is being considered to replace an antiquated
ID: 1106375 • Letter: 2
Question
2. A new condensate-recovery system is being considered to replace an antiquated system at Arun Tech. It is estimated that the new system will cost $600,000 to install now. However, the old antiquated system may be fixed at a cost to last for another two years. If the new system is delayed for another two years, it could be bought and installed at the same cost of $600,000. The company is in a budget squeeze and having problem finding the money now for the new system and is therefore considering a two year delay for the installation of the new system. If money is worth 15%, how much can the company afford to spend to fix the old system to be functional for two more years? A) 0 B) $193,200 C) $146,340 D) $222,500
2. A new condensate-recovery system is being considered to replace an antiquated system at Arun Tech. It is estimated that the new system will cost S600,000 to install now. However, the old antiquated system may be fixed at a cost to last for another two years. If the new system is delayed for another two years, it could be bought and installed at the same cost of $600,000. The company is in a budget squeeze and having problem finding the money now for the new system and is therefore considering a two year delay for the installation of the new system. If money is worth 15%, how much can the company afford to spend to fix the old system to be functional for two more years? A) 0 B) S193,200 C) S146,340 D) $222,500Explanation / Answer
The new system cost $600,000 at present.
However, this system will cost $600,000 as well, even if, it is purchased after two years.
Calculate the present value of system if it is purchased after two years -
PV = $600,000 (P/F, 15%, 2)
PV = $600,000 * 0.7561
PV = $453,660
Calculate the amount that company can afford to spend to fix the old system to be functional for two more years -
Amount = Cost of new system - PV of new system if purchase after two years
Amount = $600,000 - $453,660
Amount = $146,340
The company can afford to spend $146,340.
Hence, the correct answer is the option (C).
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