N2

Consider two different approaches to maintaining the capability to produce some given level. Option 1 requires spending $500 up front (year 0), and $150 in each of year 10 and year 20. Option 2 requires spending $250 every fifth year (i.e. year 5, 10, 15, and 20), but nothing up front.

a. If the discount rate is 5%, what is the lowest cost option?

b. At what discount rate is the present value of the costs the same?