Engineering Economy class. Please, when answering this problem, it will be more
ID: 1168337 • Letter: E
Question
Engineering Economy class. Please, when answering this problem, it will be more than appreciated if you can present the whole process (equations) before solving. Just to understand better everything. Example: Present Value = 20,000(P/F, i, n)+45,000(A/F, i, n)(P/F, i, n)... Thanks in advance!
There are two manufacturing processes that can be used by a company to reduce energy losses in the equipment’s. The following cost information for these two processes is known:
By doing the following analysis, select which manufacturing process must be selected (A or B):
a) Find the Present Value with an interest rate of 12% annually computed quarterly.
b) Quarterly equivalent uniform value with an interest rate of 8% annually computed quarterly
c) Capitalized Cost with an interest rate of 14% annually computed quarterly
d) Which manufacturing process must be selected
Process A Process B Initial Cost $170,000 $220,000 Operation and Maintenance Cost $7,000 quarterly $5,000 quarterly Useful Life (Life Cycle) 2 years 4 years Residual Value $30,000 $42,000Explanation / Answer
Solution :
a) The present value of cash flows with an interest rate of 12% annually computed quarterly.
PV = - $ 7000 / ( 1+(0.12/4))4X1+ - $ 7000 / ( 1+(0.12/4))4X2
PV = -$ 6219.40 - $ 5525.86
PV = -$ 11,745.26
Residual cash flows = $ 30,000
Present value of residual cash flow = $ 30,000 / ( 1+(0.12/4))4X2
Present value of residual cash flow = $ 23,682.27
Net present value = -$ 170,000 - -$ 11,745.26 + $ 23,682.27
Net present value = -$ 158,062.99
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