Answer:
<u>Desing A: </u>23,024,370
<u>Desing B: </u>22,520,274.6
It should purchase desing B as the capitalized cost is lower.
Explanation:
We consider annuity for the overhauls and then, perpetuity to consider this incinerators will last indefinitely.
maintenance cost: 800,000 / 0.05 = 16,000,000
<u>Overhaul: </u>
The company will need to fund 1,250,000 every 5 years. We need to determinate the annuity to obtain this future value:
PV 1,250,000
time 5
rate 0.05
C $ $ 226,218.498
<u>Then at perpetuity:</u>
$ 226,218.498 / 0.05 = 4,524,370
<u>Desing A capitalized cost:</u>
2,500,000 + 16,000,000 + 4,524,370 = 23,024,370
We do the same for Desing B:
investment: 5,750,000
maintenance: 600,000 / 0.05 = 12,000,000
overhaul:
C $ 238,513.725
238,513.73/0.05 = 4,770,274.6
Capitalized cost: 5,750,000 + 12,000,000 + 4,770,274.6 = 22,520,274.6