North-Star Manufacturing Company, in southern Ontario, is looking to upgrade its

Question

North-Star Manufacturing Company, in southern Ontario, is looking to upgrade its Hydro-forming operation. The engineering department is choosing between two hydro forming press models (Press A, or B). The company has a MARR (Minimum Acceptable Rate of Return) of 9%. Salvage value for both presses at the end of their service lives is expected at $150,000. Answer the following questions using the information in the table below. What is the assumption needed in comparing mutually exclusive alternatives of different lives? Based on Annual Worth comparison, which alternative should be selected? Based on Present Worth comparison, which alternative should be selected? Do both methods (Present Worth and Annual Worth) always yield to the same decision? For a twenty-year study period, what salvage value for press B would make it a better choice?

Explanation / Answer

Equivalent Annual Worth = NPV / PVIFA 9%, Xy

Answer (a) : In case of mutually exclusive alternatives of different lifes, the assumption needed is Equivalent Annual Worth.

Answer (b): Based on Annual OWrth assumption, Press A should be selected.

Answer (c): Based on Net Present Value assumption Press A should be selected.

Answer (d): No. Net Present Value method & Equ. Annual Worth method, always NOT yield to the same decision. It may be or may not be.

Answer (e): Press B , life span 20 years:

For 20 yrs, NPV of Press B is higher by $79,422 than Press A. Hence if we divide teh value by PVFA 8%,20y, we get value of $446,192. A such salvage pf $446,192 & above, should look , to make it better choice.

Notes: 1) NPV means Net Cash Out Flow. Here NPV is given in gegative term.

2) NPV of Increamental maintaince Cost is computed from teh following tables.

Statement of Cash Outflows Press A Press B Year Particulars PV factor CF($) DCF ($) CF($) DCF ($) a b c d e (= c x d) f g (= C x f) 0 Down Payment 1      600,000.00    600,000.00        700,000.00    700,000.00 1 to 20 Annual Installment : Press A 9.129           9,000.00      82,161.00 1 to 25 Annual Installment : Press B 9.823             7,000.00       68,761.00 1 to 20 Maintainance Cost : Press A 9.129           3,000.00      27,387.00 1 to 25 Maintainance Cost : Press B 9.823             2,000.00       19,646.00 2 to 20 Increantal running cost : Press A 8.212      24,710.79 2 to 25 Increantal running cost : Press B 8.906                      -         23,077.95 1 to 20 Running cost per year : Press A 9.129           6,000.00      54,774.00                      -   1 to 25 Running cost per year : Press B 9.823                      -               4,000.00       39,292.00 20 Salvage value Press A 0.178    (150,000.00)    (26,700.00) 25 Salvage value Press B 0.116      (150,000.00)    (17,400.00) NPVs of Press A & B    762,332.79    833,376.95 Equiuvalent Annual Worth : Press A 9.129      83,506.71 Equiuvalent Annual Worth : Press B 9.823       84,839.35

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