You and your partner have become very interested in cross-country motorcycle racing and wish to purchase entry-level equipment. You have identified two alternative sets of equipment and gear. Package K has a first cost of $160,000, an operating cost of $7000 per quarter, and a salvage value of $40,000 after its 2-year life. Package L has a first cost of $210,000 with a lower operating cost of $5000 per quarter, and an estimated $26,000 salvage value after its 4-year life. Which package offers the lower present worth analysis at an interest rate of 8% per year, compounded quarterly?
What will be an ideal response?
PWK = -160,000 – 7000(P/A,2%,16) –120,000(P/F,2%,8) + 40,000(P/F,2%,16)
= -160,000 – 7000(13.5777) –120,000(0.8535) + 40,000(0.7284)
= $-328,328
PWL = -210,000 – 5000(P/A,2%,16) + 26,000(P/F,2%,16)
= -210,000 – 5000(13.5777) + 26,000(0.7284)
= $-258,950
Purchase package L
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