Your first assignment as an engineering technology graduate from the University

Question

Your first assignment as an engineering technology graduate from the University of Houston downtown is to recommend to management which of two equipment candidates should be selected. The two candidates have the following parameters (MARR = 15% per year):

Candidate X: useful life of 8 years; estimated market value at end of life of $800; annual running expenses of

$400; annual revenues produced of $1,600 and an initial installed cost of $4,500.

Candidate Y: useful life of 10 years; estimated market value at end of life of $1,200; annual running expenses

of $500; annual revenues produced of $1,850 and an initial installed cost of $6,000.

(a) Given all the above factors, which candidate should be selected?

(b) By how much would the estimated capital investment for the alternate candidate [the candidate not selected

above in (a)] have to vary from your first decision in (a)?

(c) All other factors being the same except the life of Candidate X, what would be the life of Candidate X if the

decision is a tossup, that is, no one Candidate has an economic advantage over the other?

Explanation / Answer

a. we will use net present value method to find out which is better

NPV of candidate X = 1600*(1/1.15 +1.15^2....+1/1.15^8) -800/1.15^8 -400*(1/1.15+1/1.15^2.....+1/1.15^8) -4500

NPV =623.26

.

for cabndidate Y

NPV = 1850*(1/1.15 +1.15^2....+1/1.15^10) -1200/1.15^10 -500*(1/1.15+1/1.15^2.....+1/1.15^10) -6000

NPV =478.714

.............. As NPV of candidate x is more ,candidate X is preffered

b. capital investment of Y should be 623.26-478.714 less than Y's actual ie 144.55 less

...........

c.let n year for X hence

NPV =1600*(1/1.15 +1.15^2....+1/1.15^n) -800/1.15^n -400*(1/1.15+1/1.15^2.....+1/1.15^n) -4500

which is equal to Y's NPV ie 478.714

hence n =7.649 years

life of candidate X should be 7.649 yrs

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