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 $46,000, an annual operating cost (AOC) of $7,000, and a service life of 2 years. Method B will cost $86,000 to buy and will have an AOC of $3,500 over its 4-year service life. Method C costs $115,000 initially with an AOC of $6,000 over its 8-year life. Methods A and B will have no salvage value, but Method C will have equipment worth 12% of its first cost. Perform a present worth analysis to select the method at i = 10% per year. Determine present worth

The present worth of method A is $ .

The present worth of method B is $ .

The present worth of method C is $ .

Explanation / Answer

(1) PW, Method A ($) = 46,000 + 7,000 x P/A(12%, 2)

= 46,000 + 7,000 x 1.6901**

= 46,000 + 11,830.7

= 57,830.7

(2) PW, Method B ($) = 86,000 + 3,500 x P/A(12%, 4)

= 86,000 + 3,500 x 3.0373**

= 86,000 + 10,630.55

= 96,630.55

(3) Salvage value for Method C = $115,000 x 12% = $13,800

PW, Method C ($) = 115,000 + 6,000 x P/A(12%, 8) - 13,800 x P/F(12%, 8)

= 115,000 + 6,000 x 4.9676** - 13,800 x 0.4039**

= 115,000 + 29,805.6 - 5,573.82

= 139,231.78

(NOTE: We computed PW of all costs. If PW of benefits are required, all the answers should have a negative (-) sign).

**From P/A and P/F factor tables

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