3. A CNC machine can be replaced with one of two models. The basic model with a

Question

3. A CNC machine can be replaced with one of two models. The basic model with a life of 8 years costs $60,000 and is expected to bring in net $18,000 annually. For the deluxe model, the data are 8 years. S100.000, and S30,000 respectively Assuming , = 8%, calculate the discounted payback period for each project. (25 points) A CNC machine can be replaced with one of two models. The basic model with a life of 8 years model, the data are 8 years, $100,000, and which model is a better choice on the basis of the PW criterion? (25points) costs $60.000 and is expected to bring in net $18,000 annually. For the deluxe 10%. S30.000 respectively if the MARR mhich model is a better choice on the basis of the PW (25points)

Explanation / Answer

(3)

Discounted Payback Period (DPBP) is the time by when cumulative discounted Cash flow is zero.

For Basic model, DPBP lies between years 4 & 5.

DPBP = 4 + (Absolute value of cumulative discounted Cash flow, year 4 / Discounted Cash flow, year 5)

= 4 + (382 / 12,250) = 4 + 0.03 = 4.0312

= 4.0312 years

For Deluxe model, DPBP lies between years 4 & 5.

DPBP = 4 + (Absolute value of cumulative discounted Cash flow, year 4 / Discounted Cash flow, year 5)

= 4 + (636 / 20,417) = 4 + 0.0312 = 4.0312

= 4.0312 years

Both models have equal DPBP.

NOTE: First question is answered.

Basic Model Year Cash Flow ($) PV Factor @8% Discounted Cash Flow ($) Cumulative Discounted Cash Flow ($) (A) (B) (A) x (B) 0 -60,000 1.0000 -60,000 -60,000 1 18,000 0.9259 16,667 -43,333 2 18,000 0.8573 15,432 -27,901 3 18,000 0.7938 14,289 -13,612 4 18,000 0.7350 13,231 -382 5 18,000 0.6806 12,250 11,869 Deluxe Model Year Cash Flow ($) PV Factor @8% Discounted Cash Flow ($) Cumulative Discounted Cash Flow ($) (A) (B) (A) x (B) 0 -1,00,000 1.0000 -1,00,000 -1,00,000 1 30,000 0.9259 27,778 -72,222 2 30,000 0.8573 25,720 -46,502 3 30,000 0.7938 23,815 -22,687 4 30,000 0.7350 22,051 -636 5 30,000 0.6806 20,417 19,781

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