Engineering economics, show me step by steps Two machines are being considered f

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Engineering economics, show me step by steps

Two machines are being considered for the same 12 year task. The purchase will be made just at the start of year 2016 (year 0-1).

This year, Machine A costs $15,000 new and is estimated to last 6 years. At the end of its life it will have a trade-in value of 20% of its purchase price. The replacement cost of Machine A will increase by 4 percent per year (compounded annually) from its price in the year 2006. The trade-in value will be 20% of the purchase price. It will initially cost $3200 per year to operate and maintain Machine A. The o&m cost for machine A will also increase by 4%/year .

Machine B costs $30,000 new, is estimated to last 12 years, and will have a trade-in value of 25% of its purchase price. It will initially cost $1500 per year to operate and maintain Machine B. The o&m cost for machine B will increase by 4%/year .

Using an interest rate of 6 percent, compounded annually, compare the two machines and offer a recommendation. State the basis for your comparison. Draw the cash-flow diagram for each alternative.

Explanation / Answer

Machine A End of year Initial Cost Replacement Cost O&M cost Total Cost Present Value Salvage Value 0 15000 15000 15000 1 600 3200 3200 3018.87 2 624 3328 3328 2961.91 3 648.96 3461.12 3461.12 2906.02 4 674.92 3599.56 3599.56 2851.19 5 701.92 3743.55 3743.55 2797.40 6 729.99 3893.29 3893.29 2744.62 3000 7 15730 3200 15930 10594.35 8 3328 3328 2088.03 9 3461.12 3461.12 2048.63 10 3599.56 3599.56 2009.98 11 3743.55 3743.55 1972.05 12 3893.29 893.29 443.94 3000 Total 51436.99 Machine B End of year Initial Cost O&M cost Total Cost Present Value Salvage Value 0 30000 30000 30000 1 1500 1500 1415.09 2 1560 1560 1388.39 3 1622.4 1622.4 1362.20 4 1687.30 1687.296 1336.50 5 1754.79 1754.788 1311.28 6 1824.98 1824.979 1286.54 7 1897.98 1897.979 1262.26 8 1973.90 1973.898 1238.45 9 2052.85 2052.854 1215.08 10 2134.97 2134.968 1192.15 11 2220.37 2220.366 1169.66 12 2309.18 -5190.82 -2579.68 7500 Total 41597.93 Machine B should be purchased as overall it has less cost involved with its present value at $41597.93.

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