A company must decide between two new machines. The first machine has an initial
ID: 1206094 • Letter: A
Question
A company must decide between two new machines. The first machine has an initial cost of 45000 with an estimated life of 12 years and a salvage value of 8000. Its annual operating cost is 4000. The second machine has an initial cost of 30000, the same estimated life with a salvage value of 0. Its annual operating cost is 3000. The interest rate environment causes an MARR of 6 % per year. What is the annual worth of each machine? What decision rule should be used for determining the preferred machine? Which machine is recommended?Explanation / Answer
Annual worth of First Machine
Initial cost = $45000
Annual Operating cost = $4000
Salvage value = $8000
Time (n) = 12 years
R = 6%
Present value (PV) of total cost = initial cost + PV of annual operating cost - PV of salvage value
Present value (PV) of total cost = 45000 + 4000*(1-1/(1+R)^n)/R - 8000/(1+R)^n
Present value (PV) of total cost = 45000+ 4000*(1-1/1.06^12)/.06 - 8000/1.06^12
Present value (PV) of total cost = $74559.62
Now, we have to calculate the annual worth (AW) of the machine.
Present value (PV) of total cost = AW*(1-1/(1+R)^n)/R = AW*(1-1/1.06^12)/.06
74559.62 = AW*8.3838
AW = 74559.62 / 8.3838
AW = $8893.29
Annual worth of Second Machine
Initial cost = $30000
Annual Operating cost = $3000
Salvage value = 0
Time (n) = 12 years
R = 6%
Present value (PV) of total cost = initial cost + PV of annual operating cost
Present value (PV) of total cost = 30000 + 3000*(1-1/(1+R)^n)/R = 30000 + 3000*(1-1/1.06^12)/.06
Present value (PV) of total cost = $55151.53
Now, we have to calculate the annual worth (AW) of the machine.
Present value (PV) of total cost = AW*(1-1/(1+R)^n)/R = AW*(1-1/1.06^12)/.06
AW = 55151.53 / 8.3838
AW = $6578.34
Thus, annual worth of first machine is $8893.29 and annual worth of second machine is $6578.34.
b.
Machine having lower annual worth will be preferred over the machine having high annual worth.
c.
Second machine is recommended.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.