Question

Two methods can be used to produce expansion anchors. Method A costs $65,000 initially and will have a $18,000 salvage value after 3 years. The operating cost with this method will be $28,000 in year 1, increasing by $3600 each year. Method B will have a first cost of $108,000, an operating cost of $8000 in year 1, increasing by $8000 each year, and a $38,000 salvage value after its 3-year life. At an interest rate of 8% per year, which method should be used on the basis of a present worth analysis

Answer 1

Answer:

Method B should be used

Explanation:

Note: See the attached excel file for the calculation of the present worth of Method A and Method B.

From the attached excel file, we have:

Present worth of Method A = –$210,889.85

Present worth of Method B = –$118,011.18

Since the present worth of Method A and B above imply Method A costs more than Method B, Method B should be used.