) 3. A firm is considering the purchase of one of two new machines. The data on
ID: 2664947 • Letter: #
Question
) 3. A firm is considering the purchase of one of two new machines. The data on each are given below.Machine A Machine B
Initial cost $40,000 $60,000
Service life 8 years 10 years
Salvage value $2,000 $5,000
Net operating cost $5,000/year $3,000/year
a) If the firm's MARR is 12%, which alternative should be selected when using equivalent annual cost comparison?
b) If the firm only needs the machine for 5 years. Assuming a salvage value will be $8,000 for Machine A, $15,000 for Machine B at the end of 5th year, which alternative should be selected when using present equivalent cost comparison?
Explanation / Answer
A firm is considering the purchase of one of two new machines. The data on each are given below.Machine A Machine B
Initial cost $40,000 $60,000
Service life 8 years 10 years
Salvage value $2,000 $5,000
Net operating cost $5,000/year $3,000/year
a) If the firm's MARR is 12%, which alternative should be selected when using equivalent annual cost comparison?
Machine A:
Equvalnet annual cost= (Initial cost /A.P@12%,8yrs )+ Operating cost per annum - (salvage value/
AF@12%,8yrs)
AP= Present value of an annuity: when i=12%, n=8 yrs AP= 4.9676
AF= Future value annuity factor:when i=12%, n=8 yrs AF= 12.299
EAC of machine A= 40000/4.9676 + 5000 - 2000/12.299
= 8052.178+5000-162.614
= 12889.56
AP= Present value of an annuity: when i=12%, n=10 yrs AP= 5.65
AF= Future value annuity factor:when i=12%, n=10 yrs AF= 17.54
EAC of machine B= 60000/5.65 + 3000 - 5000/17.54
= 10619.47+ 3000 - 285.06
= 13334.41
Since machine A cost is low it is selected.
b) If the firm only needs the machine for 5 years. Assuming a salvage value will be $8,000 for Machine A, $15,000 for Machine B at the end of 5th year, which alternative should be selected when using present equivalent cost comparison?
If it is for 5 yrs than n=5 and i= 12. Machine A Machine B Initial cost 40000 60000 Salvage value 8000 15000 Operational cost 5000 3000 AP @n=5,i=12% 3.6048 3.6048 AF @n=5,i=12% 6.3528 6.3528 EAC 14837.03 17283.31 EAC of machine A is low so, it is selected.. If it is for 5 yrs than n=5 and i= 12. Machine A Machine B Initial cost 40000 60000 Salvage value 8000 15000 Operational cost 5000 3000 AP @n=5,i=12% 3.6048 3.6048 AF @n=5,i=12% 6.3528 6.3528 EAC 14837.03 17283.31 EAC of machine A is low so, it is selected.. Machine A Machine B Initial cost 40000 60000 Salvage value 8000 15000 Operational cost 5000 3000 AP @n=5,i=12% 3.6048 3.6048 AF @n=5,i=12% 6.3528 6.3528 EAC 14837.03 17283.31
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.