1. (30 points) Your friend has decided to drop out of school and make his living
ID: 1159651 • Letter: 1
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1. (30 points) Your friend has decided to drop out of school and make his living selling hand-made wooden chess games. He must replace his used lathe soon and has found two possible replacements, shown on the table below. One is a new, cheap lathe intended for the hobby market, which will last for five years at the intended use. A more expensive new professional model will last longer (20 years). The table below summarizes the costs. Hobbyist New pro lathelathe $2,000$25,000 Initial cost Annual operating cost Salvage Machine life, years $8,000 $0 $1,000 $15,000 20 Using an interest rate (MARR) of 8% per year, determine which option he should select to maximize his profits over 20 years. Use Annual Worth or Present Value (with LCM) 2.000Explanation / Answer
Annual worth of the Hobbyist lathe = -$2000(A/P, 8%, 5) - $15000(A/F, 8%,5) +$0 = -$2000*.1547-$15000*.1047 = -$1879.9
Annual worth of the New pro lathe = -$25000(A/P, 8%,20)-$8000(A/F,8%,20)+ $1000(A/F,8%, 20)= -25000*.1019-8000*.02185+1000*.02185= -$2700.45
Since AW of New pro lathe is less than the AW of the Hobbyist lathe, it is wise to select Hobbyist lathe for profit maximization over 20 years.
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