One of two methods must be used to produce expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $30,000 per year. Method B will have a first cost of $120,000, an operating cost of $8000 per year, and a $40,000 salvage value after its 3-year life. At an interest rate of 12% per year, which method should be used on the basis of a present worth analysis? Also, write the two spreadsheet functions to perform the PW analysis.
What will be an ideal response?
PWA = -80,000 – 30,000(P/A,12%,3) + 15,000(P/F,12%,3)
= -80,000 – 30,000(2.4018) + 15,000(0.7118)
= $-141,377
PWB = -120,000 – 8,000(P/A,12%,3) + 40,000(P/F,12%,3)
= -120,000 – 8,000(2.4018) + 40,000(0.7118)
= $-110,742
Select Method B
Spreadsheet functions: For PWA: = -PV(12%,3,-30000,15000) - 80000
For PWB: = -PV(12%,3,-8000,40000) - 120000
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