The AW of 3-year-old machine that is used in the manufacture of modular magnetic

Question

The AW of 3-year-old machine that is used in the manufacture of modular magnetic encoders, which provide data on the speed and positioning of rotating motor shafts, is $-48,000. A challenger will have a first cost of $90,000, an operating cost of $29,000, and a salvage value after 5 years that may vary considerably. The interest rate is 10% per year and optimistic, most likely, and pessimistic salvage values are $15,000, $10,000, and $2000, respectively. Given probabilities of 20%, 60%, and 20% for optimistic most likely, and pessimistic salvage values respectively, would you select the challenger or defender?

A) The Defender because the Challenger has a higher AW of $-51,202

B) The Challenger because the defender has a higher AW of $-48,000

C) The Defender because the Challenger has a higher AW of $-50,285

D) The Challenger because it has lower AW of $-25,390

Explanation / Answer

Here we should select The Defender because the Challenger has a higher AW of $-51,202 . (Ans - A)

The Annual worth of defender can be calculated as follows - [ -29000 - 90000(A/P, 10%, 5)]+[{0.20*15000(A/F,10%,5)} + {0.60*10000(A/F,10%,5)} + {0.20*2000(A/F,10%,5)}] = [-29000 -90000*0.2638] +[491.40 + 982.80 + 65.52] = -52742 +1540 = -51202 . So the challanger has higher annual worth of $-51202.

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