a company is considering investing $15,000 in a heat exchanger. the heat exchanger will last five years, at…

a company is considering investing $15,000 in a heat exchanger. the heat exchanger will last five years, at which time it will be sold for $2,000. the maintenance cost at the end of the first year is estimated to be $2,000. maintenance costs are estimated to increase by $500 per year over its life. as an alternative, the company may lease the equipment for $x per year, including maintenance, with the annual payments to be made at the end of each year. (a) choose the cash - flow diagram of the lease alternative (b) what is the cash - flow diagram of the purchasing alternative? choose the correct answer below

a company is considering investing $15,000 in a heat exchanger. the heat exchanger will last five years, at which time it will be sold for $2,000. the maintenance cost at the end of the first year is estimated to be $2,000. maintenance costs are estimated to increase by $500 per year over its life. as an alternative, the company may lease the equipment for $x per year, including maintenance, with the annual payments to be made at the end of each year. (a) choose the cash - flow diagram of the lease alternative (b) what is the cash - flow diagram of the purchasing alternative? choose the correct answer below

Answer

Explanation:

Step1: Analyze the purchase - cost

The company invests $15,000 at time 0 for the heat - exchanger. This is the initial cash - outlay.

Step2: Analyze the maintenance costs

The maintenance cost at the end of the first year is $2,000. Then it increases by $500 per year. So the maintenance costs for years 1 - 5 are $2,000, $2,500, $3,000, $3,500, $4,000 respectively.

Step3: Analyze the salvage value

The heat - exchanger is sold for $2,000 at the end of year 5. This is a cash - inflow at the end of year 5.

Looking at the cash - flow diagrams:

  • At time 0, there is a cash - outflow of $15,000.
  • At the end of year 1, there is a cash - outflow of $2,000.
  • At the end of year 2, there is a cash - outflow of $2,500.
  • At the end of year 3, there is a cash - outflow of $3,000.
  • At the end of year 4, there is a cash - outflow of $3,500.
  • At the end of year 5, there is a cash - outflow of $4,000 and a cash - inflow of $2,000.

The correct cash - flow diagram is the one where at time 0 there is a $15,000 outflow, and the outflows for years 1 - 5 follow the pattern of increasing by $500 each year with a $2,000 inflow at the end of year 5.

Answer: D