Production equipment is to be replaced immediately as it is outdated. The two be
ID: 1190082 • Letter: P
Question
Production equipment is to be replaced immediately as it is outdated. The two best alternatives are a used equipment (A) and a new automated equipment (B). The economic estimates for each are shown in the table below. The MARR is 15% per year. Which alternative is preferred?
Alternative A
Alternative B
Capital investment
$14,000
$65,000
Annual expenses
$10,000
$9,000
Useful life (years)
5
10
Market value (at end of useful life)
$8,000
$13,000
Alternative A
Alternative B
Capital investment
$14,000
$65,000
Annual expenses
$10,000
$9,000
Useful life (years)
5
10
Market value (at end of useful life)
$8,000
$13,000
Explanation / Answer
Calculating Net Present Value (NPV) for each alternative
Alternative A: Using the formula for NPV calculation and annuity formula for annual expenses
-14000-10000[1-1/(1.15)^5]/0.15 + 8000/(1+0.15)^5 = -43,544
Alternative B:
-65000-9000[1-1/(1.15)^10]/0.15 + 13000/(1+0.15)^10 = -113,382
Therefore, alternative A would be better.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.