![Question Three Your recommendation to the city council is: [Select]](http://img.homeworklib.com/questions/87699d00-9584-11ea-a343-0fd54d701e68.png?x-oss-process=image/resize,w_560)
Answers
Equivalent annual cost of option one = 3500000 * (A/P, 5.5%,30) + 15000
= 3500000 * 0.068805 + 15000
= 255818.86 ~ 255819 (Nearest Dollar)
For option two
Present value of geometric series = A * [1 - (1+g)^n / (1+i)^n] / (i-g)
We need to find present value of power cost for 20 yrs
Present value of power cost = 30000 * [1 - (1+0.065)^20 / (1+0.055)^20] / (0.055-0.065)
= 30000 * [1 - (1.065)^20 / (1.055)^20] / (-0.01)
= 30000 * 20.76552198
= 622965.66
Equivalent annual cost of option two = (2500000 + 200000 * (P/F, 5.5%,8) + 622965.66) *(A/P, 5.5%,20) + 25000
= (2500000 + 200000 * 0.651599 + 622965.66) * 0.083679 + 25000
= 297232.75 ~ 297233 (Nearest Dollar)
As Equivalent annual cost of option one is lower it should be selected
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