A customer is considering to Fire Sprinkler a building to lower his insurances premium: Two choices were presented to him : (Hint: Alternates with unequal economic lives may be compared by assuming replacement in kind at the end of the shorter life, thus maintaining the same level of uniform payment) i=10%

Question:

A customer is considering to Fire Sprinkler a building to lower his insurances premium: Two choices were presented to him:

(Hint: Alternates with unequal economic lives may be compared by assuming replacement in kind at the end of the shorter life, thus maintaining the same level of uniform payment) i=10%

Partial System: Initial Cost 8,000.00, Insurance Cost $1,000.00/Year Life N=15 year

Full System $ 15,000, Insurance Cost $250/Year Life N=20 year

A) Full System $8,100

B) Full System $1,694.50

C) Partial System $8,540.00

D) Partial System $1,770.40  

The correct answer is B)

Explanation:

To chose the partial system means to incur a total sprinkler cost of $16,000 at the end of 30 years. With an added Insurance cost of $30,000. Total cost of protecting assets comes to $46,000.

The full system, however, entails a total sprinkler cost of $15,000 and an added insurance cost of $5,000. Total cost of protecting assets here comes to $20,000 over a 20 year period.

Prorated valued show B to be the least cost appliable.

Cheers!

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