Beasley Worldwide Data Destruction is considering three possible air conditionin
ID: 2711613 • Letter: B
Question
Beasley Worldwide Data Destruction is considering three possible air conditioning systems. One option is to refurbish their old system, a second is offered by SohnCo and a third is offered by RickettsAir. MARR is 12%. Data is shown in the table below:
Yearly O&M Costs
Initial Cost $
Year 1
Year 2
Year 3
Trade-in after Year 3
SohnCo
-12,000,000
-3,100,000
-3,300,000
-4,000,000
3,500,000
RickettsAir
-10,500,000
-3,500,000
-3,800,000
-4,500,000
2,500,000
Recondition
-5,000,000
-5,000,000
-5,300,000
-6,000,000
600,000
What should BWDD do and why?
Initial Cost $
Year 1
Year 2
Year 3
Trade-in after Year 3
SohnCo
-12,000,000
-3,100,000
-3,300,000
-4,000,000
3,500,000
RickettsAir
-10,500,000
-3,500,000
-3,800,000
-4,500,000
2,500,000
Recondition
-5,000,000
-5,000,000
-5,300,000
-6,000,000
600,000
Explanation / Answer
Initial Cost Year 1 Year 2 Year 3 Trade-in after year 3 Sohn Co -12000000 -3100000 -3300000 -4000000 3500000 Discount Factor 1 0.892857143 0.797193878 0.711780248 0.71178025 Discounted Value -12000000 -2767857.143 -2630739.796 -2847120.99 2491230.87 Net Present cost -17754487.1 Ricketts Air -10500000 -3500000 -3800000 -4500000 2500000 Discount Factor 1 0.892857143 0.797193878 0.711780248 0.71178025 Discounted Value -10500000 -3125000 -3029336.735 -3203011.12 1779450.62 Net Present Cost -18077897.2 Recondition -5000000 -5000000 -5300000 -6000000 600000 Discount Factor 1 0.892857143 0.797193878 0.711780248 0.71178025 Discounted Value -5000000 -4464285.714 -4225127.551 -4270681.49 427068.149 Net Present Cost -17533026.6 MARR 12% Based on the above, the net present cost of reconditioning gives a lower value and hence should be preferred