Four methods are available to recover lubricant from an automated milling system

Question

Four methods are available to recover lubricant from an automated milling system. The investment costs and income associated with each are shown. Assuming that all methods have a 10-year life with zero salvage value, determine which one should be selected using a MARR of 10% per year and the B/C method. Consider operating cost as a disbenefit. (20 points) 5. Method First cost,S Annual operating cost, S/year Annual income, S/year 15,000 19,000 25,000 33,000 10,000 12,000 9,000 11,000 16,000 20,000 19,000 22,000

Explanation / Answer

B/C Method (Benefit/Cost Method) = Present Value of Cash inflows / Present Value of Cash outflow

Method 1

Present Value of Cash inflow = (16000 - 10000) * Cumulative P.V. Factor for 10 Years @ 10 %

= 6000 * 6.1446

= $ 36867.60

B/C Ratio = 36867.60 / 15000 = 2.46 (approx)

Method 2

Present Value of Cash inflow = (20000 - 12000) * Cumulative P.V. Factor for 10 Years @ 10 %

= 8000 * 6.1446

= $ 49156.80

B/C Ratio = 49156.80 / 19000 = 2.59 (approx)

Method 3

Present Value of Cash inflow = (19000 - 9000) * Cumulative P.V. Factor for 10 Years @ 10 %

= 10000 * 6.1446

= $ 61446

B/C Ratio = 61446 / 25000 = 2.46 (approx)

Method 4

Present Value of Cash inflow = (22000 - 11000) * Cumulative P.V. Factor for 10 Years @ 10 %

= 11000 * 6.1446

= $ 67590.60

B/C Ratio = 67590.60 / 33000 = 2.05 (approx)

Conclusion:- Method 2 should be selected as it is having highest B/C Ratio than any other methods.

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