Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
Question
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Chapter 13, Problem 25P

(a):

To determine

Calculate the initial cost.

(a):

Expert Solution
Check Mark

Explanation of Solution

Initial cost of Proposal A (FCA) is $250,000. Time period (n) is 4. Annual maintenance cost (MO) is $3,000. Repainting cost for every 2 year for Proposal B (RP) is $5,000. Time period (n1) is 2 and (n2) is 12. Interest rate (i) is 12%.

Initial cost of Proposal B (FCB) can be calculated as follows:

FCA(i(1+i)n(1+i)n1)MO=FCB(i(1+i)n(1+i)n1)RP(i(1+i)n11)+RP(i(1+i)n21)250,000(0.12(1+0.12)4(1+0.12)41)3,000=(FCB(0.12(1+0.12)4(1+0.12)41)5,000(0.12(1+0.12)41)+5,000(0.12(1+0.12)41))250,000(0.32923)3,000=FCB(0.16144)5,000(0.4717)+5,000(0.04144)82,307.53,000=FCB(0.16144)2,358.5+207.2FCB(0.16144)=85,307.52,358.5+207.2FCB=83,156.20.16144=515,090.44

Initial cost of Proposal B is $515,090.14.

(b):

To determine

Calculate the initial cost of Proposal A.

(b):

Expert Solution
Check Mark

Explanation of Solution

Initial cost of Proposal B (FCB) can be calculated as follows:

FCA(i(1+i)n(1+i)n1)MO=700,000(i(1+i)n(1+i)n1)RP(i(1+i)n11)+RP(i(1+i)n21)FCA(0.12(1+0.12)4(1+0.12)41)3,000=(700,000(0.12(1+0.12)4(1+0.12)41)5,000(0.12(1+0.12)41)+5,000(0.12(1+0.12)41))FCA(0.32923)3,000=700,000(0.16144)5,000(0.4717)+5,000(0.04144)FCA(0.32923)3,000=700,000(0.16144)2,358.5+207.2FCA(0.32923)=113,0082,358.5+207.2+3,000FCB=112,159.30.32923=340,671.57

Initial cost of Proposal B is $340,671.57.

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