Two methods can be used for producing solar panels for electric power generation. Method 1 will have an initial cost of $550,000, an AOC of $160,000 per year, and $125,000 salvage value after its 3-year life. Method 2 will cost $830,000 with an AOC of $120,000, and a $240,000 salvage value after its 5?year life. Assume your boss asked you to determine which method is better, but she wants the analysis done over a 3-year planning period. You estimate the salvage value of method 2 will be 35% higher after 3 years than it is after 5 years. If the MARR is 10% per year, which method should the company select?
What will be an ideal response?
AW1 = -550,000(A/P,10%,3) – 160,000 + 125,000(A/F,10%,3)
= -550,000(0.40211) – 160,000 + 125,000(0.30211)
= $-343,397
AW2 = -830,000(A/P,10%,3) – 120,000 + 240,000(1.35)(A/F,10%,3)
= -830,000(0.40211) – 120,000 + 240,000(1.35)(0.30211)
= $-355,868
Select method 1
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