Question

. Alternative X has a first cost of $5 million and an annual maintenance cost of $200,000. Alternative Y has a first cost of $7 million, a maintenance cost of $40,000 and periodic expenditures of $100,000 every five years. If both alternatives have infinite lives, create the equation that will yield the rate of return on the incremental investment

Answer 1

0 = -$2 million + $160,000 ÷ i - $100,000(A/F,i,5) ÷ i

Step-by-step explanation:

The equation is shown below:

But before that first determine the following things

Incremental investment is

= $5000,000 - $7,000,000 - $200,000 - $40,000 - $100,000(P/F,I,N)

Now solve it

= -2 million + $160,000 - 100000(P/F,I,n)

As it is a perpetuity so

Present value = Periodic payment ÷ rate of interest

So,

0 = -$2 million + $160,000 ÷ i - $100,000(A/F,i,5) ÷ i