Lesco Chemical is considering two processes for making a cationic polymer. Process A has a first cost of $100,000 and an AOC of $60,000 per year. Process B’s first cost is $165,000. If both process will be adequate for 4 years and the rate of return on the increment between the alternatives is 25%, what is the amount of the AOC for process B?
What will be an ideal response?
The incremental cash flow equation is 0 = -65,000 + x(P/A,25%,4), where x is the difference in the AOC.
0 = -65,000 + x(2.3616)
x = 65,000/2.3616
= $27,524
AOCB = 60,000 – 27,524
= $32,476
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