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A floor is being replaced. In total, this area is about 3,000 m2. Two materials are available to ...

A floor is being replaced. In total, this area is about 3,000 m2. Two materials are available to use, either linoleum or wood flooring.

The initial investment in linoleum flooring is 350 $/m2, while the wood flooring is 570 $/m2.

Linoleum flooring: Lifetime: 24 years Cleaning: $200 /year per m2

Wood flooring: Sanding and varnishing every other year: 110 $/m2. The floor can only be sanded twice, after which it needs to be replaced. The lifetime of the floor is thus 6 years. Cleaning: 280 $/year per m2

Based on cost/revenues, which option should be chosen? Be sure to state your reason why the choice should be made.

In the subsequent calculations, a discount rate of 4% per year should be used.

(I have created and attached the cash flow diagrams to help)

0 23 24 Linoleunm $600k $600k $600k $600k $600k $1,050,000 5 0 4 6 Wood $840k $1.17M $840k $1.17M $840k $840k $1,710,000

0 23 24 Linoleunm $600k $600k $600k $600k $600k $1,050,000 5 0 4 6 Wood $840k $1.17M $840k $1.17M $840k $840k $1,710,000
0 0
ReportAnswer #1

i = 4%

EUAC of lionleum = 1050000*(A/P,4%,24) + 600000

= 1050000 * 0.065587 + 600000 = 668866.35

EUAC of wood = 1710000*(A/P,4%,6) + 840000 + (1170000-840000)*(P/F,4%, 2)*(A/P,4%,6) + (1170000-840000)*(P/F,4%,4)*(A/P,4%,6)

= 1710000*(A/P,4%,6) + 840000 + 330000*(P/F,4%, 2)*(A/P,4%,6) + 330000*(P/F,4%,4)*(A/P,4%,6)

= 1710000*0.190762 + 840000 + 330000*0.924556*0.190762 + 330000*0.854804*0.190762

= 1278216.33

As EUAC of linoleum is less it should be selected

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