1. A piece of equipment costs to purchase new. It must be replaced every years, at a cost of . The capitalized equipment cost, CC, is defined as , where is the money that must be invested now, at an annual effective compound interest rate , so that, years from now, the investment is worth . Derive an equation for the capitalized cost when the interest rate is compounded annually.

2. Your company needs to purchase a new heat exchanger. There are two options: an inexpensive heat exchanger with a short lifetime and no scrap value, and a more expensive heat exchanger with a longer lifetime that can be sold for scrap. Your company expects to earn a15% effective interest rate on all of its investments.

Complete the table below. Which heat exchanger should your company purchase?

Heat Exchanger	Purchase Price Cv	Lifetime (years)	Scrap Value	Replacement cost- Cr	Capitalized Cost
A	$20,000	6	0
B	$35,000	10	4,000