partner have become very interested in cross-country motorcycle racing and wish
ID: 1159399 • Letter: P
Question
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 $230000, an operating cost $6,000 per quarte er, and a salvage value of $60000 after its 2-year life. Package L has a first cost of $300,000 with a lower operating cost of $2.900 per quarter and an estimated $18,000 salvage value after its 4year life. Which package offers the lower pres analysis at an interest rate of 6% per year, compounded quarterly? The present worth of package Kis and that of package L is Package L offers the lower present worth.Explanation / Answer
Package K has 2 year life and package L has 4 year life, so LCM method will be used to have a 4 year life for both the package. For package K, all the investment and cost will be repeated after 2 years.
Time = 16 quarters
Quarterly interest rate = 6%/4 = 1.5%
Present worth = initial investment + present worth of the operating cost – present worth of the salvage value
Present worth of package K = 230000 + 230000/1.015^8 + 6000*(1-1/1.015^16)/.015 - 60000/1.015^8 - 60000/1.015^16
Present worth of package K = $418416.6
Present worth of package L = 300000 + 2900*(1-1/1.015^16)/.015 - 18000/1.015^16
Present worth of package L = $326796.1
Package L, should be selected as it offers the lowest present worth of the costs.
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