# Answer to Question #50039 in Finance for Jean

Question #50039

Springfield Ironworks (SI) recently had their furnace break down, and need to quickly purchase a new one to minimize the disruption in their production. They can choose a high quality furnace (H) that costs $110,000 with $4,000 of annual maintenance costs for the 7-year life of the furnace, or a low quality furnace (L) that costs $60,000 with $7,500 in annual maintenance costs for the 4-year life of the furnace. Which furnace should SI choose? What is the annualized cost of their choice? Assume a discount rate of 6%, and ignore all taxes.

Expert's answer

H costs $110,000 with $4,000 of annual maintenance costs for the 7-year life,

L costs $60,000 with $7,500 in annual maintenance costs for the 4-year life of the furnace.

r = 6%

H total costs are 110,000 + 4,000/1.06 + 4,000/1.06^2 + ... + 4,000/1.06^7 = $132,329.52

L total costs are 60,000 + 7,500/1.06 + 7,500/1.06^2 + ... + 7,500/1.06^4 = $85,978.29

SI should choose furnace L.

The annualized cost of their choice are:

For H: $18,904.22

For L: $21,497.07

L costs $60,000 with $7,500 in annual maintenance costs for the 4-year life of the furnace.

r = 6%

H total costs are 110,000 + 4,000/1.06 + 4,000/1.06^2 + ... + 4,000/1.06^7 = $132,329.52

L total costs are 60,000 + 7,500/1.06 + 7,500/1.06^2 + ... + 7,500/1.06^4 = $85,978.29

SI should choose furnace L.

The annualized cost of their choice are:

For H: $18,904.22

For L: $21,497.07

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