Two processes can be used for producing a polymer that reduces friction loss in engines. Process K will have a first cost of $160,000, an operating cost of $7000 per quarter, and a salvage value of $40,000 after its 2-year life. Process L will have a first cost of $210,000, an operating cost of $5000 per quarter, and a $26,000 salvage value after its 4-year life. Which process should be selected on the basis of a present worth analysis at an interest rate of 8% per year, compounded quarterly?

Question

Samir Macias

Business

19 October, 16:03

Two processes can be used for producing a polymer that reduces friction loss in engines. Process K will have a first cost of $160,000, an operating cost of $7000 per quarter, and a salvage value of $40,000 after its 2-year life. Process L will have a first cost of $210,000, an operating cost of $5000 per quarter, and a $26,000 salvage value after its 4-year life. Which process should be selected on the basis of a present worth analysis at an interest rate of 8% per year, compounded quarterly?

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Jimena Jimenez · Answer 1

Process L will be selected because their NPV is better than Process K

Explanation:

Process K will have a year 0 investment of - $160,000.00

Then during 8 quarter a cost of 7,000 present value of - $51,278.37

Lastly, a salvage value of 40,000 at the end PV of $34,293.55

Net present value of Process K - $176.984,82

at 8% per year with quarterly compound

Process L will have a year 0 investment of - $210,000.00

Then during 16 quarter a cost of 5,000 PV of - $36,627.41

26000 salvage value at the end of the period: pv $19110.76

Net present value of Process L - $154.261,82

at 8% per year with quarterly compound