Kristoffer John Giganto (20102597)

ECON ASSIGNMENT #6

1. A restaurant owner is trying to decide between two different garbage disposals. A

regular steel (RS) disposal has an initial cost of P3500, a life of 4 years and a
maintenance cost of P100 at the end of the second year. The alternative is a
corrosion-resistant disposal constructed primarily of stainless steel (SS). The
initial cost of SS disposal is P6000, but it is expected to last for 6 years. Because
the SS disposal has a slightly larger motor, it is expected to cost about P200 per
year to operate. The salvage value of SS disposal is expected to be P500 at the
end of 6 years. If the interest rate is 15% per year compounded quarterly. (a.)
Draw the cash flow diagram. (b.) Which disposal should be selected?

a.) Cash Flow Diagram

Regular Steel

Stainless Steel Disposal

.
b.)
2. Compare the alternatives shown below on the basis of their capitalized costs.
Use i=14% per year. Include the cash flow diagram in your solution.

Cash Flow Diagram

i = 14% = 0.14

Capitalized Cost of Alternative X:

𝐴 𝐴
[8,500,000 × ( ,14%,5)+ 8,000 + 5,000 × ( ,14%,5)]
𝑃 𝐹
CC =
0.14

8,500,000 × 0.2913+ 8,000 + 5,000 × 0.1513

=
0.14

2,484,807
= = $17,748,621
0.14

Capitalized Cost of Alternative Y:

7,000
CC = 50,000,000 − ( 0.14 )

= 50,000,000 − 50,000
= $49,950,000