Baon Chemicals Unlimited purchases a computer-controlled filter for \($100\),000. Half of the purchase price is borrowed from a bank at 15 percent compounded annually. The loan is to be paid back with equal annual payments over a 5-year period. The filter is expected to last 10 years, at which time it will have a salvage value of \($10\),000.
Over the 10-year period, the operating and maintenance costs are expected to equal \($20\),000 in year 1 and increase by \($1\),500/year each year thereafter. By making the investment, annual fines of \($50\),000 for pollution will be avoided. Baon expects to earn 12 percent compounded annually on its investments. Based on a present worth analysis, determine whether purchasing the filter is economically justified.