Question

In: Economics

Two alternatives are under consideration. The first alternative will cost $100,000, require $20,000 in maintenance and...

Two alternatives are under consideration. The first alternative will cost $100,000, require $20,000 in maintenance and operation costs each year, and a life cycle of 4 years. The second alternative will cost $300,000, require $5,000 in maintenance and operation costs each year and a life of 6 years. Neither option will have a salvage value.

In order to compute the present worth or future worth, how many years of each alternative should I use to accurately compare the two alternatives.

Solutions

Expert Solution

Since the life of two alternatives are unequal, for comparision using present or future worth method, we have to take Least Common Multiple(LCM) of the life of the alternatives. Here, the LCM of 4 and 6 = 12 years.

Thus, in order to compute the present worth or future worth, 12 years of each alternative I should use to accurately compare the two alternatives.

Rahul Sunny answered 2 years ago
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