A machine that produces a certain piece must be turned off by the operator after

Question

A machine that produces a certain piece must be turned off by the operator after each piece is completed. The machine "coasts" for 15 seconds after it is turned off, thus preventing the operator from removing the piece quickly before producing the next piece. An engineer has suggested installing a brake that would reduce the coasting time to 3 seconds.

The machine produces 50,000 pieces a year. The time to produce one piece is 1 minute 45 seconds, excluding coastint time. The operator earns $9 an hour and other direct costs for operating the machine are $3 an hour. The brake will require servicing every 557 hours of operation. It will take the operator 30 minutes to perform the necessary maintenance and will require $46 in parts and material. The brake is expected to last 7,500 hours of operation (with proper maintenance) and will have no salvage value.

How much could be spent for the brake if the Minimum Attractive Rate of Return is 10% compounded annually?

Enter your answer in this format: 1234.56

Explanation / Answer

Present Running Cost of the Machine:

Cost per Year if Brake is installed:

Net Saving Per Year: 28,334 - 25,654 = $2,680

Life of Machine = 7,500 / 1,500 = 5 Years

Discounting Factor at 10% = 3.791

Present Value of Net Saving of 5 years: 2,680 x 3.791 = $10,160

That is the maximum amount that can be Spent on Brake.

Time Taken to Produce One Unit (1.45 + 15 Sec.) 2 Min. Units Produced in a Hour (60 / 2) 30 Total Hours Required to Produced 50,000 Units (50,000/30) 1666.67 Labor Cost (1,666.67 x 13) 21,667 Other Direct Cost for Operating The Machine (1,666.67 x 4) 6,667 Total Cost Per Year 28,334

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