An airport needs a modern material handling system for facilitating access to an

Question

An airport needs a modern material handling system for facilitating access to and from a busy
maintenance hanger. A second-hand system will cost $75,000. A new system with improved
technology can decrease labor hours by 20% compared to the used system. The new system
will cost $150,000 to purchase and install. Both systems have a useful life of five years. The
market value of the used system is expected to be $20,000 in five years, and the market value of
the new system is anticipated to be $50,000 in five years. Current maintenance activity will
require the used system to be operated 8 hours per day for 20 days per month. If labor costs
$40 per hour and the MARR is 1% per month, which system should be recommended?

Explanation / Answer

Step 1: input the annual cash flow into excel:

use NPV function to calculate NPV for new, used, and new minus used(meaning if u switch from used to new whats the cost and savings from that stratedgy).

As we can see, New has a less negative PV than used. On top of that, New minus used has a positive PV, hence, it makes sense to use the new machine.

Year New Used New minus Used 0 -150000 -75000 -75000 1 -61440 -76800 15360 2 -61440 -76800 15360 3 -61440 -76800 15360 4 -61440 -76800 15360 5 -11440 -56800 45360 NPV ($400,621.53) ($428,714.21) $28,092.67 NPV(0.01,B3:B7)+B2

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