Answer: please refer to the explanation section
Explanation:
Design A
Initial cost $2500 000
operating and maintenance cost = $800 000
Overhauls = $1250000 in 5 years
R = 5%
PV= overhaul cost/(1+r)^n + maintenance cost(1 -(1+r)^-5)/r
PV = 1250000/(1 + 0.05)^5 + 800000(1 - (1 + 0.05)^-5)/0.05
PV = 979407.71 + 3463581.34 = 4442989.05
costs to be capitalized = present value of overhaul costs = 979407. 71
Design A will be valued at = 2500000 + 979407. 71 = 347907.71
Total cost of Choosing Design A = 979407.71 + 3463581.34 + 2500000
Total cost of Choosing Design A = 6942989.05
Design B
initial cost = $5750000
Operating and Maintenance = $600000
Overhauls = $3000000 in 10 years
PV= overhaul cost/(1+r)^n + maintenance cost(1 -(1+r)^-5)/r
PV = 3000000/(1 + 0.05)^10 + 600000(1 - (1 + 0.05)^-10)/0.05
PV = 1841739.76 + 4633040.96 = 6474780.72
Cost to be capitalized = overhaul cost = 1841739.76
Design B will be value at = 1841739.76 + 5750000 = 7591739.76
Total cost of costs Design B = 1841739.76 + 5750000 + 4633040.96
Total cost of costs Design B = 12224780.72
Design B involves more costs than Design A. Present value for total cost for choosing Design B is Higher than the present value for Total costs of choosing Design A
Choose Design A
