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The following costs are associated with three tomato-peeling machines being cons

ID: 2455497 • Letter: T

Question

The following costs are associated with three tomato-peeling machines being considered for use in a food canning plant.

                                                                        Machine A     Machine B     Machine C    

First cost                                                         $52,000.00      $63,000.00      $67,000.00

Maintenance & Operating Costs                   15,000.00        9,000.00          12,000.00       

Annual benefits                                             38,000.00        31,000.00        37,000.00

Salvage Value                                                            13,000.00        19,000.00        22,000.00

Useful life in Years                                        4                      6                      12

If the canning company uses a MARR of 12% which is the best alternative? USE NPW to make your decision Note: Consider the least common multiple as the study period.

Explanation / Answer

Machine A

Machine B

Machine C

First Cost

52,000

63,000

67,000

Maintenance & Operating Costs

15,000

9,000

12,000

Annual benefits

38,000

31,000

37,000

Salvage Value

13,000

19,000

22,000

Useful life in Years

4

6

12

Machine A:

NPW4 = -$52,000 + ($ 38,000 - $ 15,000)(P/A, 12%, 4 ) + $ 13,000 (P/F, 12%, 4)

           = -$52,000 + $ 69,851 + $ 8,262

          = $26,113

NPW12 = NPW4 [1 + (P/F, 12%, 4 ) + (P/F, 12%, 8)]

             = $26,113 [1+(1.12)-4 + (1.12)-8]

             = $53,255

Machine B:

NPW6 = -$63,000 + ($ 31,000 - $ 9,000)(P/A, 12%, 6 ) + $ 19,000 (P/F, 12%, 6)

           = -$63,000 + $ 90,442 + $ 9,625

          = $37,067

NPW12 = NPW6 [1 + (P/F, 12%, 6 )]

             = $37,067 [1+(1.12)-6 ]

             = $55,846

Machine C:

NPW12 = -$67,000 + ($ 37,000 - $ 12,000)(P/A, 12%, 12 ) + $ 22,000 (P/F, 12%, 12)

           = -$67,000 + $ 154,850 + $ 5,647

          = $93,497

Machine C is correct choice.

Machine A

Machine B

Machine C

First Cost

52,000

63,000

67,000

Maintenance & Operating Costs

15,000

9,000

12,000

Annual benefits

38,000

31,000

37,000

Salvage Value

13,000

19,000

22,000

Useful life in Years

4

6

12

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