Answer to Question #127659 in Economics for RAIN

Question

A contractor is purchasing steel-bending machinery. Three options are being considered. The financial data for the three options and the residual value at the end of their economic life are given in Table 2. The bank interest rate is 10%, compounded annually.

i) Compare the three options based on their annual worth.
[21 Marks]
ii) Select the best option using the Equivalent Annual Worth (EAW) method.
[4 Marks]
Table 2
Proposed First cost (RM) Annual operating cost (RM) Salvage value (RM Economic Life (years)
Option 1 12,500,000 150,000 45,000 10
Option 2 17,400,000 185,000 65,000 11
Option 3 8,000,000 95,000 45,000 9

Answer 1

It is more profitable to use the third option