Question: A firm is having a large piece of equipment overhauled. It anticipates that the machine will be needed for the next 12 years. The firm

A firm is having a large piece of equipment overhauled. It anticipates that the machine will be needed for the next 12 years. The firm has an 8% minimum attractive rate of return. The contractor has suggested three alternatives:

(a) A complete overhaul for $6000 that should permit 12 years of operation.

(b) A major overhaul for $4500 that can be expected to provide 8years of service. At the end of 8 years, a minor overhaul would be needed.

(c) A minor overhaul now. At the end of 4 arid8 years, additional minor overhauls would be needed. If minor overhauls cost $2500, which alternative should the firm select? If minor overhauls, which now cost $2500, increase in cost at +5% per year, but other costs remain unchanged, which alterative should the firm select?

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No Inflation Situation Alternative A PW of Cost 6000 Alternative B PW of Cost 4500 2500 PF 8 8 4500 ... View full answer

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