Question
Luxury Homes Limited in mid west is to install a new laundry system for one of its elegant residential buildings.The company is choosing between three
Luxury Homes Limited in mid west is to install a new laundry system for one of its elegant residential buildings.The company is choosing between three laundry systems. System A has a leasing cost of $500 per year (10 year contract and lease payments are made at the end of the year) and installation cost of $1,000. Annual Savings of this system is expected to be $700 per year(energy savings). System B has a purchase price of $3000, and installation cost $600. It has salvage value of $500 after 10 years of service, and is expected to provide savings of $750 per year. System C has a purchased price of $5000, including installation. A quarter of this post is paid now, and the rest is paid at the end of the first year. It has a salvage value of $1000 after 10 years, and is expected to provide savings of $800 per year. Maintenance is covered by laundry systems providers up to 10 years and Luxury Homes has a MARR(Minimum Acceptable Rate of Return) of 12%.
a) Using a rate of return method, which laundry system should be installed?(Hint: one system must be chosen).
b) Should the best alternative in this type of analysis(rate of return) be always the one with the highest rate of return?
c) Are you expecting different results if the comparison is based on Annual Worth?
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