Gopher Manufacturing is considering purchasing new calibration equipment to impr

Question

Gopher Manufacturing is considering purchasing new calibration equipment to improve the quality of its processes. The equipment has an initial cost of $66,000 and a market value of $52,000 at the end of its useful life of 10 years. Net annual revenue is estimated based on the production and market conditions and is shown below. If the optimistic and pessimistic values each have an estimated 11% chance of occurring, determine whether the equipment should be purchased on the basis of the expected value of AW. Use a MARR of 8% per year.

Net annual revenue, $/year Optimistic Most likely Pessimistic 93,500 90,000 88,500 Gopher Manufacturing is considering purchasing new calibration equipment to improve the quality of its processes. The equipment has an initial cost of $66,000 and a market value of $52,000 at the end of its useful life of 10 years. Net annual revenue is estimated based on the production and market conditions and is shown below. If the optimistic and pessimistic values each have an estimated 11% chance of occurring, determine whether the equipment should be purchased on the basis of the expected value of AW. Use a MARR of 8% per year.

Explanation / Answer

Optimistics scenario

NPV = -66000 + 93500*(1-1/1.08^10)/8% + 52000/1.08^10=585,478.67

AW = 585,478.67/((1-1/1.08^10)/8%)=87253.59

Most likely

NPV = -66000 + 90000*(1-1/1.08^10)/8% + 52000/1.08^10=561,993.39

AW = 561,993.39/((1-1/1.08^10)/8%)= 83753.59

Pessimistic

NPV = -66000 + 88500*(1-1/1.08^10)/8% + 52000/1.08^10=551,928.27

AW = 551,928.27/((1-1/1.08^10)/8%)= 82,253.59

Expected AW = 11%*87253.59 + 11%*82,253.59 + (1-22%)*83753.59=                          $ 83,973.59

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