Present Value and final decisions
Asked Feb 10, 2010, 04:04 AM
Bottom Up Diaper Service is considering the purchase of a new industrial washer. It can purchase a high-efficiency washer for $12 000 or an ordinary washer for $9 000. The installation and delivery charge is $480. The high-efficiency washer lasts for 8 years while the ordinary washer lasts only 6 years. The operating cost totals to $1500/year for the high-efficiency washer and $1600/year for the ordinary washer. Both washers will be depreciated using straight-line method. Neither will have salvage value at the end of life. The firm's tax rate is 40%
a) Assume that the cost of capital for the firm is 12%, what is the present value of the total costs (including capital outlay and operating costs) for the high-efficiency washer and ordinary waster, respectively?
b) Assume that the washers would have to replaced once they are junked at the end of their life, which washer should the firm purchase? Why?