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# 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.
1
2014-12-17T11:40:26-0500
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

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