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Unformatted text preview: current equipment in fifteen months if they still want to sell the old unit for $1,800. In other words, the life of the current unit will be shortened by nine months on account of its use by members of XYZ Health Club. Assuming the discount rate to be 0.36% per month, what payment from XYZ Health Club would compensate ABC Fitness Club for the fact that their current equipment will need replacement 9 months earlier than would have been necessary at the rate of normal use? 2. Suppose a firm with a cost of capital of 15% per year needs equipment on an ongoing basis. The equipment costs $120K to buy at t=0, and the operating and maintenance (O&M) costs at t=1,2,…9 are $15K, $15K, $20K, $20K, $30K, $40K, $50K, $60K, and $80K respectively. Work out how often the firm should replace one unit with another in order to minimize the total costs (sum of replacement and O&M costs)....
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This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Summer '07 term at Berkeley.
- Summer '07