An electric switch manufacturing company is trying to decide between three diffe

Question

An electric switch manufacturing company is trying to decide between three different assembly methods. Method A has an estimated first cost of $36,000, an annual operating cost (AOC) of $8,000, and a service life of 2 years. Method B will cost $77,000 to buy and will have an AOC of $9,500 over its 4-year service life. Method C costs $139,000 initially with an AOC of $7,000 over its 8-year life. Methods A and B will have no salvage value, but Method C will have equipment worth 14% of its first cost.

Perform a future worth analysis to select the method at i = 11% per year.

The future worth of method A is $  .

The future worth of method B is $  .

The future worth of method C is $  .

Method  (Click to select) ( A  B  C ) is selected.

Explanation / Answer

ANSWER:

1) FW OF A:

first cost = $36,000

aoc = $8,000

n = 2 years

i = 11%

pw of a = first cost + aoc(p/a,i,n)

pw of a = -36,000 - 8,000(p/a,11%,2)

pw of a = -36,000 - 8,000 * 1.713

pw of a = -36,000 - 13,704

pw of a = -$49,704

fw of a = pw of a(f/p,i,n)

fw of a = -49,704(f/p,11%,2)

fw of a = -49,704 * 1.232

fw of a = -$61,235.33

2) FW OF B:

first cost = $77,000

aoc = $9,500

n = 4 years

i = 11%

pw of b = first cost + aoc(p/a,i,n)

pw of b = -77,000 - 9,500(p/a,11%,4)

pw of b = -77,000 - 9,500 * 3.102

pw of b = -77,000 - 29,469

pw of b = -$106,469

fw of b = pw of b(f/p,i,n)

fw of b = -106,469(f/p,11%,4)

fw of b = -106,469 * 1.518

fw of b = -$161,619.9

3) FW OF C:

first cost = $139,000

aoc = $7,000

salvage value = 14% * first cost = 14% * $139,000 = $19,460

n = 8 years

i = 11%

pw of c = first cost + aoc(p/a,i,n) + salvage value(p/f,i,n)

pw of c = -139,000 - 7,000(p/a,11%,8) + 19,460(p/f,11%,8)

pw of c = -139,000 - 7,000 * 5.146 + 19,460 * 0.4339

pw of c = -139,000 - 36,022 + 8,443.69

pw of c = -$166,578

fw of c = pw of c(f/p,i,n)

fw of c = -166,578(f/p,11%,8)

fw of c = -166,578 * 2.305

fw of c = -$383,963

so we will select method a as it has the highest future worth of all the 3 methods.

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