Leonard, a company that manufactures explosionproof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $900,000 now and $560,000 two years from now, with annual M&O costs of $79,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company’s MARR of 20% per year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered recently.)
Leonard, a company that manufactures explosionproof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $900,000 now and $560,000 two years from now, with annual M&O costs of $79,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company’s MARR of 20% per year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered recently.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Leonard, a company that manufactures explosionproof
motors, is considering two alternatives for expanding
its international export capacity. Option 1
requires equipment purchases of $900,000 now and
$560,000 two years from now, with annual M&O
costs of $79,000 in years 1 through 10. Option 2
involves subcontracting some of the production at
costs of $280,000 per year beginning now through
the end of year 10. Neither option will have a significant
salvage value. Use a present worth analysis
to determine which option is more attractive at the
company’s MARR of 20% per year. (Note: Check
out the spreadsheet exercises for new options that
Leonard has been offered recently.)
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