Question
Bob Tate is the project manager for a large tunnel project through the Swiss Alps. Planning is at a preliminary stage with one of the
Bob Tate is the project manager for a large tunnel project through the Swiss Alps. Planning is at a preliminary stage with one of the biggest decisions being which type of drilling machinery to use. There are two options, one built by a Scottish firm, the other by a South Korean firm.
The Scottish machine is the cheaper of the two. Each machine will cost $100M; life, 2 years; salvage value at end of two years, $20M; annual operating costs for both years, $50M assume incurred at end of each year.
The South Korean machine is more expensive, but lasts longer of the two. Each machine will cost $150M; life, 3 years; salvage value at end of three years, $50M; annual operating costs for all three years, $40M assume incurred at end of each year.
If the tunnel will take six years of digging and the appropriate risk adjusted discount rate is 5.0%, which choice should Bob make, Scottish machine, or the other from the South Korean firm?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started