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3. Three methods can be used to compare investment alternatives with different lifetimes: Common denominator method: NPV with periodic replacement until the lifetimes of both

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3. Three methods can be used to compare investment alternatives with different lifetimes: Common denominator method: NPV with periodic replacement until the lifetimes of both expire at the same time Capitalized cost method: The Equivalent Capitalized Cost (ECC) is the investment that would have to be made now so that the equipment could be purchased and operated forever, with the interest earned paying the periodic replacement cost: YOC . (1+i)" ).. ECC=1 where YOC is the yearly operating cost, P is the purchase price, i the interest rate, and n the lifetime of the equipment Equivalent annual operating cost (EAOC) method: As though the purchase price P of the equipment were borrowed at interest rate i and paid back over the lifetime n of the equipment. EAOC = 1 * ECC Two alternative pieces of equipment are being considered for the separation of solids from a liquid slurry. Details are given below: Equipment type Service Life (n) Operating Cost (YOC) Capital Investment (P) Rotary vacuum filter 5 years $1900/y $13,000 Hydrocyclone + 8 years $1300/y $26,000 centrifuge Use the three methods described above to determine which alternative is cheapest for 10% interest

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