Leonard, a company that manufactures explosion-proof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $700,000 now and $400,000 two years from now, with annual M&O costs of $50,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $200,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company's MARR of 10% per year. Hint: What is the formula of present worth analysis? Solution: Leonard, a company that manufactures explosion-proof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $700,000 now and $400,000 two years from now, with annual M&O costs of $50,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $200,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company's MARR of 10% per year. Hint: What is the formula of present worth analysis? Solution