Suppose that you have just completed the mechanical design of a high-speed autom

Question

Suppose that you have just completed the mechanical design of a high-speed automated palletizer that has an investment cost of $3,000,000. The existing palletizer is quite old and has no salvage value. The market value for the new palletizer is estimated to be 5300,000 after seven years. One million pallets will be handled by the palletizer each year during the seven-year expected project life. What net savings per pallet (i.e., total savings less expenses) will have to be generated by the palletizer to justify this purchase in view of a MARR of 20% per year? Use the AW method Click the icon to view the interest and annuity table for discrete compounding when the MARR is 20% per year The net savings required to be generated by the new palletizer to justify its purchase are S per pallet (Round to the nearest cent

Explanation / Answer

Initial Investment = $3,000,000

Salvage Value after 7 years = $300,000

MARR = 20%

What should be the net savings to justify the investment using AW method?

$3,000,000 (A/P, 20%, 7) = Annual Savings + $300,000 (A/F, 20%, 7)

$3,000,000 (0.27742) = Annual Savings + $300,000 (0.07742)

$832,260 = Annual Savings + $23,226

Annual Savings = $832,260 – $23,226

Annual Savings = $809,034

The net savings required to be generated by the new pelletizer to justify its purchase is $809,034.

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