Telefono Mexico is expanding its facilities to serve a new manufacturing plant. The new plant will require

Question:

Telefono Mexico is expanding its facilities to serve a new manufacturing plant. The new plant will require 2000 telephone lines this year, and another 2000 lines after expansion in 10 years. The plant will be in operation for 30 years. The telephone company is evaluating two options to serve the demand.
Option 1 Provide one cable now with capacity to serve 4000 lines. The cable cost will be $200,000, and annual maintenance costs will be $15,000.
Option 2 Provide a cable with capacity to serve 2000 lines now and a second cable to serve the other 2000 lines in 10 years.
The cost of each cable will be $150,000, and each cable will have an annual maintenance of $10,000.
The telephone cables will last at least 30 years, and the cost of removing the cables is offset by their .
(a) Which alternative should be selected based on a 10% interest rate?
(b) Will your answer to (a) change if the demand for additional lines occurs in 5 years instead of 10 years?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...