You want to implement an automatic control in the production process of a factory. The cost Initial is $130,000, useful life is 10 years, and salvage value is zero. It is estimated that it will produce a net savings of $60,000 per year, before depreciation, interest, and taxes. They have two financing alternatives. The first (A) is a credit from the equipment supplier for 60% of the total cost, 6% annual interest, in five equal annual payments, the first at the end of the first year. The second (B) is a bank loan for the entire amount of the investment with a 12% annual interest that must be settled in four equal annuities, the first at the end of the first year. The equipment is depreciated on a straight line basis, 50% taxes are paid and the MARR of the company is 10%. Determine the best financing alternative from the point of economic view, using mixed TMAR and an analysis period of 10 years. Answer: NPV = $122,637.43; NPVB = $98,317.42. Option A must be selected.
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You want to implement an automatic control in the production process of a factory. The cost Initial is $130,000, useful life is 10 years, and salvage value is zero. It is estimated that it will produce a net savings of $60,000 per year, before depreciation, interest, and taxes. They have two financing alternatives. The first (A) is a credit from the equipment supplier for 60% of the total cost, 6% annual interest, in five equal annual payments, the first at the end of the first year. The second (B) is a bank loan for the entire amount of the investment with a 12% annual interest that must be settled in four equal annuities, the first at the end of the first year. The equipment is depreciated on a straight line basis, 50% taxes are paid and the MARR of the company is 10%. Determine the best financing alternative from the point of economic view, using mixed TMAR and an analysis period of 10 years.
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