A salesman from Industrial Water Services (IWS), who is trying to get his foot in the door of Westco Refining, offered electro-dialysis equipment for $2.5 million. This is $800,000 more than the price offered by a competing saleswoman from AG Enterprises. However, IWS said Westco won’t have to pay for the equipment until the 2-year warranty runs out. IWS will also offer an extended 2-year warranty for $100,000, payable 2 years from now. If Westco does want the extended warranty, determine which offer is better using Westco’s real return requirement of 15% per year and an assumed inflation rate of 3.5% per year.
What will be an ideal response?
if = 0.15 + 0.035 + (0.15)(0.035) = 0.19025 (19.025%)
PWIWS = (2,500,000 + 100,000)(P/F,19.025%,2)
= 2,600,000[(1/(1 + 0.19025)2]
= 2,600,000(0.70587)
= $1,835,262
PWAG = $1,700,000
Select AG Enterprises
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