1-Assume that by investing $2000000 in transportation system we can prevent 30 a

Question

1-Assume that by investing $2000000 in transportation system we can prevent 30 accidents per year and save another $100 on annual maintenance cost of vehicals using the system ( 2000 vehicles). The annual maintanence cost for this system is $200000, if each accident costs $5000 for the comunity , detrrmine whether this investment is justified ( i=6%). The life of the project is 20 years.

2-A company bought a piece of equipment for $100000 3 years ago, with salvage values of $20000 after 8 years. The machine now can be sold for $35000. The annual operating cost for this equipment is $15000. A new piece of equipment can be bought for $100000 with a salvege value of $20000 after 5 years, with an annual operating cost of $5000. At MARR = 10% should we replace this equipment with a new one?

Explanation / Answer

1. Annual savings = 30*$5000 +$100 *2000 - $200000=150,000 NPV = -$2000000 +150000/1.06 +150000/1.06^2 ....+150000/1.06^20 =-$279,511.82 NPV is negative, this investment is not justified

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