2 Problem 06.018 Evaluating Alternatives by Annual Worth Analysis An Internation

Question

2 Problem 06.018 Evaluating Alternatives by Annual Worth Analysis An International textile company's North America Division must decide which type of fabric cutting machines it will use-a straight knife or a round knife. The estimates are summarized below. Compare them on the basis of annual worths at i-10%. eBook Hint Pant References First Cost AOC, per Year Overhaul in Year 2 Salvage Value ife Round Knife $-300,000 $44,000 Straight Knife $44.000 $13,000 $44,000 years 4 years The (Caick to select)type of fabric cutting machine will be used by the company

Explanation / Answer

Alternative 1 - Round Knife

Calculate the annual worth -

AW = First cost(A/P, i, n) + AOC + Salvage value(A/F, i, n)

AW = -300,000(A/P, 10%, 6) - 44,000 + 44,000(A/F, 10%, 6)

AW = (-300,000 * 0.22961) - 44,000 + (44,000 * 0.12961)

AW = -68,883 - 44,000 + 5,702.84

AW = -107,180.16

The annual worth of Round Knife machine is $-107,180.16

Alternative 1 - Straight Knife

Calculate the annual worth -

AW = First cost(A/P, i, n) + AOC + Overhaul cost (A/F, i, n) + Salvage value(A/F, i, n)

AW = -220,000(A/P, 10%, 4) - 44,000 - 26,000(A/F, 10%, 2) + 13,000(A/F, 10%, 4)

AW = (-220,000 * 0.31547) - 44,000 - (26,000 * 0.47619) + (13,000 * 0.21547)

AW = -69,403.4 - 44,000 - 12,380.94 + 2,801.11

AW = -122,983.23

The annual worth of Straight Knife machine is $-122,983.23

The annual worth of Round Knife machine is numerically higher.

So,

The Round Knife type of fabric cutting machine will be used by the company.

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