Problem 1. (20 Pts) Two storage structures, given code names Y and Z, are being
ID: 2614951 • Letter: P
Question
Problem 1. (20 Pts) Two storage structures, given code names Y and Z, are being considered for a military base. The military uses a 6% percent/year expected rate of return and a 24-year life for decisions of this type. The relevant characteristics for each structure are shown below.
Structure Y Structure Z
First Cost 24225 24225
Estimated Life 12 years 24 years
Estimated Salvage Value None $1,800
Annual Maintenance Cost $1,000 $720
a) What is the future worth of each machine? b) What is the decision rule for determining the preferred machine based on future worth ranking? c) Which structure should be recommended? d) Plot a graph for both alternatives future worth changes with expected ARR (annual rate of return) if expected annual rate of return varies from 6 % to 9% ?
Explanation / Answer
structure y is perfered on basis of future worth ranking
Structure Y
Annual worth = 32608.8 / 8.3838 = $3890
Structure Z
Annual worth = 32816.70 / 12.55036 = $ 2614.8
Structure Z Should be recommended having annual cost less than structure Y.
Structure Y Year Cost PVF (6%) PV 0 First cost 24225 1 24225 1-12 Annual maintenance cost 1000 8.3838 8383.8 12 Estimated salvage value 0 0.497 0 Future Worth 32608.8Related Questions
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