Below are AW costs for both a defender and challenger for different number of ye

Question

Below are AW costs for both a defender and challenger for different number of years. Use the information to determine when the defender should be replaced. Use an interest rate of 15% per year.

                Years Kept/Used

Defender

(AW if kept/Use stated number of years ($))

Challenger

(AW if kept/Use stated number of years ($))

-12,500

-18,000

-14,300

-16,500

-15,450

-14,300

-17,000

-15,000

A)Replace the defender now

B)Keep the defender for 3 years then replace it with the Challenger

C)Keep the defender for 2 years then replace it with the Challenger

D)Keep the defender for all 4 years

E)Keep the defender for 1 year then replace it with the Challenger

                Years Kept/Used

Defender

(AW if kept/Use stated number of years ($))

Challenger

(AW if kept/Use stated number of years ($))

-12,500

-18,000

-14,300

-16,500

-15,450

-14,300

-17,000

-15,000

Explanation / Answer

We need to check the annual worth of the defender and the Challenger and they are given to us. Hence we see that the defender, when sold in the third year will be bearing a cost of 15450, while the Challenger will have a lower cost of 14300. So if we keep the defender till 2 years and then in the third year we sell it we will be able to justify the purchase of Challenger in the 3rd year. Therefore optionsl C is correct.

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