You have a business making fishing rod holders. There are two options for improv

Question

You have a business making fishing rod holders. There are two options for improvement. O new, cheap molder which will last for five years at the intended use. A more expensive new professional model will last longer (15 years). The table below summarizes the costs. Hobbyist New pro lathe lathe S25,000 $230,000 $120,000 $110,000 10000 $25,000 Initial cost Annual operating cost Salvage 15 Machine life, years5 using an interest rate (MARR) of 12% per year, determine which option he should select to maximize his profits over 15 years.

Explanation / Answer

Given, MARR=12%

so, the present value of cost of the Hobbyist Lathe is

for 5 years,

PVH = 25000+120000{ (1/1.12)+(1/1.12^2)+(1/1.12^3)+(1/1.12^4)+(1/1.12^5)} -10000/1.12^5 +

=25000+ 120000(0.893+0.797+0.711+0.635+0.567)-10000(0.567)

=$ (19325.732+432360)

=$451685.732

So. for 15 years,

PVH= 451685.732+ (451685.732/1.12^10)+(451685.732/1.12^15) = $680165.511

The Present value of cost of new pro lathe for 15 years :

PVN= 230000+ 110000{(1/1.12)+(1/1.12^2)+(1/1.12^3)+(1/1.12^4)+(1/1.12^5)+(1/1.12^6)+(1/1.12^7)+(1/1.12^8)+(1/1.12^9)+(1/1.12^10)+(1/1.12^11)+(1/1.12^12)+(1/1.12^13)+(1/1.12^14)+(1/1.12^15)} - (25000/1.12^15)

Since New techonology costs moreb than the older one. So , he should choose the Hobbyist Lathe.

=$774305

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