Question

Two methods can be used for producing solar panels for electric power generation. Method 1 will have an initial cost of $550,000, an AOC of $160,000 per year, and $125,000 salvage value after its 3-year life. Method 2 will cost $830,000 with an AOC of $120,000, and a $240,000 salvage value after its 5-year life. Assume your boss asked you to determine which method is better, but she wants the analysis done over a 3-year planning period. You estimate the salvage value of method 2 will be 35% higher after 3 years than it is after 5 years. If the MARR is 10% per year, which method should the company select?

Answer 1

method 1 should be selected.

Step-by-step explanation:

for method 1:

p = 550000

a = 160000

s = 125000

I = 10%

n = 3 years

aw = -550000(a/p, 0.10,3)-160000+125000(a/f,0.10,3)

= -550000(0.4021)-160000+125000(0.3021)

= -221155-160000+37762.5

= -343.392.5 dollars

for method 2:

salvage value = 240000x1.35

= 324000

p= 830000

a = 120000

s = 324000

I = 0.10 or 10%

n = 3

aw = -830000(a/p,0.10,3)-120000+324000(a/f,10%,3)

= -830000(0.4021)-120000+324000(0.3021)

= -333743-120000+97880.4

= -355862.6 dollars

after comparing both values, method 1 is better