Two machines are being considered for improving a process. Machine A has a first

Question

Two machines are being considered for improving a process. Machine A has a first cost of $200,000 and annual maintenance and operating costs (m&o) of $60,000 and it will result in costs reductive of $120,000 per year. Machine B has a first cost of $300,000 and annual maintenence and operating cost (m&o) of $100,000 and it will result in costs reductions of $200,000 per year. use a 5 year study period and assume both machines A or B have no salvages. Determine which machine should be selected on the basis of rate of return if the MARR is 15% per year compounded annually.

Explanation / Answer

Machine A

=-200,000(P|A 5,15%)-60,000(P|A 5,15%)+120,000(P|A 5,15%)
=-200,000( 10.380)-60,000( 10.380)+120,000( 10.380)
=-2076000-622800+1245600
=-1453200
Machine B

=-300,000(P|A 5,15%)-200,000(P|A 5,15%)
=-300,000( 10.380)-200,000( 10.380)
=-3114000--2076000
=-5190000

SELECT MACHINE A

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