A firm finds that it will be necessary to air-condition a rather large area for its computers and data processing equipment. An engineering study revealed that the more money spent on insulating the walls and ceiling area, the less money required for the air-conditioning unit. The engineers estimates, all in dollars, are as follows:

	1	2	3	4
First cost of insulation	35,000	45,000	60,000	80,000
First cost of air conditioning	52,000	45,000	38,000	32,000
Annual power cost	6,500	5,100	4,100	3,500

The study also estimated that (1) the insulating material would have a life of 20 years with zero salvage and (2) the air-conditioning equipment would have a life of 10 years with no salvage value. Taxes and insurance are expected to be 2 percent of the first cost per year. Which alternative should be selected if this firm requires a 15 percent rate of return before taxes and a PW evaluation is used? Assume that any replacement costs will remain the same as the current value.