You are considering upgrading some manufacturing facilities by purchasing one of
ID: 2775089 • Letter: Y
Question
You are considering upgrading some manufacturing facilities by purchasing one of three different machines, each with the same production capacity. Machine A costs $33,000, has a life of 40 years, annual maintenance costs of $ 1800, and salvage value of $6500. Machine B costs $22,000, has a life of 20 years, annual maintenance of $2500, and salvage value of $3000. Machine C costs $11,000, has a life of 10 years, annual maintenance of $3500, and no salvage value. Determine the most economical choice, based on minimizing the present value of total costs over a 40-year period. Use an annual discount rate of 8%. Assume that initial machine costs, annual maintenance, and discount rates are constant throughout the analysis period.Explanation / Answer
MAchine A = Total cost net of realizable value /PVAF@8%,40
= [Purchase cost + (PVAF@8%,40 * annual cost) - (PVF@8%,40 *salvage) ]/PVAF@8%,40
= [33,000 + (11.92461 * 1800 ) - (.04603 * 6500 ) ] / 11.92461
=[33000+ 21464.30 - 299.20 ] / 11.92461
= 54165.10 / 11.92461
= $ 4542.30 annual cost.
Machine B= [22000 + (9.81815 * 2500 ) - (.21455 *3000) ] / 9.81815
=[22000+ 24545.38 - 643.65 ] /9.81815
= 45901.73 / 9.81815
= $ 4675.19 annual cost
Machine C= [11000 + (6.71008 * 3500 ) - 0 ] / 6.71008
= [11000 + 23485.28 ] / 6.71008
= 34485.28 / 6.71008
= $ 5139.32 annual cost
since Machine A has a lowest equated annual cost ,It is economical to buy.
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