2. Given: Your company is considering purchasing an $80,000 piece of equipment to reduce labor costs and would like to evaluate two options over a four-year period. Assume an interest rate of 9% compounded annually, and bring all the costs back to the present (determine the present cost). Draw cash flow diagrams for both options, and identify the best option. Option 1: Do not purchase the equipment and continue paying current labor costs of $30,000 per year. $97,191.60 Option 2: Purchase the $80,000 piece of equipment and reduce labor costs to $15,000 per year. $111,453.45 Maintenance costs for the new piece of equipment are $1,000 for year 1, $1,500 for year 2, $2,500 for year 3, and $5,000 for year 4 (paid out at the end of the year) The salvage value of the equipment is estimated at $35,000 after four years. Required: Which option is better Solution: .

2. Given: Your company is considering purchasing an $80,000 piece of equipment to reduce labor costs and would like to evaluate two options over a four-year period. Assume an interest rate of 9% compounded annually, and bring all the costs back to the present (determine the present cost). Draw cash flow diagrams for both options, and identify the best option. Option 1: Do not purchase the equipment and continue paying current labor costs of $30,000 per year. $97,191.60 Option 2: Purchase the $80,000 piece of equipment and reduce labor costs to $15,000 per year. $111,453.45 Maintenance costs for the new piece of equipment are $1,000 for year 1, $1,500 for year 2, $2,500 for year 3, and $5,000 for year 4 (paid out at the end of the year) The salvage value of the equipment is estimated at $35,000 after four years. Required: Which option is better Solution: .

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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