Question

In: Economics

The construction costs and annual maintenance costs of two MSRs are given below. Using equivalent uniform...

The construction costs and annual maintenance costs of two MSRs are given below. Using equivalent uniform annual cost (EUAC) analysis, which alternative would you recommend? Assume 7% interest and infinite life.

Alternative A Alternative B
Construction cost $25M $50M
Annual maintenance costs $3.5M $2.0M

Group of answer choices

Alternative A because its EUAC is $5.25M

Alternative A because its EUAC is $5.5M

Alternative B because its EUAC is $5.25M

Alternative B because its EUAC is $4.8M

Solutions

Expert Solution

​EAC= (Asset Price×Discount Rate​)/1−(1+Discount Rate)-n

where:Discount Rate= Interest Rate

n=Number of periods​

As n tends to infiniy, (1+Discount Rate)-n tends to 0.

Hence, the denominator becomes 1

EUAC for infinite period = (Asset Price×Discount Rate​)

EUAC for alternative A = 25M * 0.07 = 17.5M

EUAC for alternative B = 50M*0.07 = 35M

Hence, alternative A should be chosen.

Rahul Sunny answered 2 years ago
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