Answer:
the company should choose method 1
Explanation:
Method 1 Method 2
Initial outlay $550,000 $830,000
operating costs (years 1,2,3) $160,000 $120,000
salvage value $125,000 $324,000
we must determine which alternative has the lowest present value:
method 1 = $550,000 + $160,000/1.1 + $160,000/1.1² + $160,000/1.1³ - $125,000/1.1³ = $550,000 + $145,455 + $132,231 + $120,210 - $93,914 = <u>$853,982</u>
method 2 = $830,000 + $120,000/1.1 + $120,000/1.1² + $120,000/1.1³ - $324,000/1.1³ = $830,000 + $109,091 + $99,174 + $90,158 - $243,426 = $884,996
