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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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Answered 1 year ago
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Given:

System 11:

  • First cost: $145000\$145000
  • Annual maintenance cost: $10000\$10000
  • Overhaul cost: $30000\$30000
  • Estimeated useful life: 1212 years
  • Interest rate: 4%4\%

System 22:

  • First-year maintenance cost: $5000\$5000
  • Annual increase in maintenance cost: $500\$500
  • Estimeated useful life: 1212 years
  • Interest rate: 4%4\%

Required:

  • First cost for system 22.

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