In: Economics
Please show work and use the actual equations, not excel ones.
An RV manufacturer estimates that annual profits will increase if a mobile model is built and taken to trade shows to market their product line. A finance and engineering team has looked at the issue and has developed to options:
1.) A large model can be developed at a cost of $75,000, and it should increase annual profits by $25,000 per year.
2.) A small model can be developed for $40,000, but it will only increase annual profits by $14,500 per year.
The salvage value for the large model is $6000 more than the small model after their common useful life of 6 years, and it costs $1,500 more a year to transport to the trade shows. The manufacturer uses an interest rate of %18. Use an annual worth comparison to make a recommendation on which, if either, option should be chosen.