Your responses must contain the following to receive full credit:
Cash flow diagram of your problem
Specify the model/equation used [e.g. P=F(1+i)-N ]
Specify the values of each parameter [e.g. i=0.05 or 5% ]
Answer the question of the problem with a complete sentence that includes your numerical justification.
The Field Museum of Natural History in Chicago must replace the pillars and front facade of their iconic entrance. Two options are being considered using different replacement techniques and materials:
• Option 1: Initial cost of replacement is $1,300,000. Every 12 years the pillars and façade will need a thorough cleaning that will cost $400,000, and that cost will continue every 12 years.
• Option 2: Initial cost of replacement is $1,000,000. Every 7 years the pillars and façade will need a thorough cleaning that will cost $300,000, and that cost will continue every 7 years. Additionally, there will be an annual maintenance cost of $10,000 for minor touchups.
The museum’s minimum attractive rate of return for their economic evaluations is 8%, and they base decisions on a net present worth analysis. They hope these pillars and front façade will be there forever. Including all costs for each option for all years, which option will you recommend to the museum and why?