Two processes can be used for producing a polymer that reduces friction loss in

ID: 1152008 • Letter: T

Question

Two processes can be used for producing a polymer that reduces friction loss in engines. Process T will have a fi rst cost of $750,000, an operating cost of $60,000 per year, and a salvage value of $80,000 after its 2-year life. Process W will have a fi rst cost of $1,350,000, an operating cost of $25,000 per year, and a $120,000 salvage value after its 4-year life. Process W will also require updating at the end of year 2 at a cost of $90,000. Which process should be selected on the basis of a future worth analysis at an interest rate of 12% per year? FWT$-2.227,331 FWw $-2,236,604 in

Explanation / Answer

Process T

Process W

First Cost

750,000

1,350,000

Operating Cost

60,000

25,000

Salvage Value

80,000

120,000

Life

2 years

4 years

Updating cost (only Process W)

90,000 at the end of 2nd year

Rate of interest 12%.

As the life of both the process is unequal, use common multiple method and convert the unequal life into equal life.

The common multiple of 2 and 4 is 4. So Process T is to be repeated 2 times to make it equal to Process W.

Future Worth of Process T

FW = 750,000 (F/P, 12%, 4) + 750,000 (F/P, 12%, 2) + 60,000 (F/A, 12%, 4) –

80,000 (F/P, 12%, 2) – 80,000

FW = 750,000 (1.5735) + 750,000 (1.2544) + 60,000 (4.7793) –

80,000 (1.2544) – 80,000

FW = 2,227,331

Future Worth of Process W

FW = 1,350,000 (F/P, 12%, 4) + 25,000 (F/A, 12%, 4) + 90,000 (F/P, 12%, 2) – 120,000

FW = 1,350,000 (1.5735) + 25,000 (4.7793) + 90,000 (1.2544) – 120,000

FW = 2,236,604

Select the Process T

Difference between the FW of W and T is 9,273 (2,236,604 – 2,227,331)