Question

Two heat exchangers are under consideration for purchase. A standard type of heat exchanger (code name HX1) has an initial installed cost of $20,000 and a useful life of 6 years. At the end of its useful life, the standard heat exchanger has a negligible salvage value, assumed to be 0. Another type of heat exchanger (Code name HX2) with equivalent design capacity has an initial installed cost of $34,000, and a useful life of 10 years with a salvage value of $4,000. Assuming an effective interest rate of 6% per year, determine which heat exchanger will heat exchanger will result in the lower capitalized cost.

Answer 1

Answer:

The lower capitalized cost is associated with HX1

Explanation:

The capitalized cost is basically the present cost. Therefore, for the Heat Exchanger HX1, the capitalized cost will be:

CC1 = First Cost

CC1 = - $ 20,000

Negative sign shows cash outflow.

Now, for Heat Exchanger HX2, we have:

CC2 = - $ 34,000 + ($ 4,000)(P/F, 6%, 10)

Now, we use the factor tables to calculate the present worth (P) of the salvage value, which is actually future worth, after 10 years at a compounded interest of 6% per year.

The factor table is provided in picture, with the value indicated.

CC2 = - $ 34,000 + ($ 4,000)(0.5584)

CC2 = - $ 34,000 + $ 2,233.6

CC2 = - $ 31,766.4

From the capitalized cost, taking look at the absolute values of both heat exchangers we can conclude that:

The Heat Exchanger that will result in lower capitalized cost is HX1