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# Hinson's Homegrown Farms needs a new irrigation system. System one will cost $145,000, have annual maintenance costs of$10,000, and need an overhaul at the end of year six costing $30,000. System two will have first-year maintenance costs of$5000 with increases of \$500 each year thereafter. System two would not require an overhaul. Both systems will have no salvage value after 12 years. If Hinson's cost of capital is 4%, using annual worth analysis determine the maximum Hinson should be willing to pay for system two.

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Given:

System $1$:

• First cost: $\145000$
• Annual maintenance cost: $\10000$
• Overhaul cost: $\30000$
• Estimeated useful life: $12$ years
• Interest rate: $4\%$

System $2$:

• First-year maintenance cost: $\5000$
• Annual increase in maintenance cost: $\500$
• Estimeated useful life: $12$ years
• Interest rate: $4\%$

Required:

• First cost for system $2$.

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