Two processes can be used for producing a poly- mer that reduces friction loss i

Question

Two processes can be used for producing a poly- mer that reduces friction loss in engines. Process T will have a first cost of $750,000, an operating cost of $60,000 per year, and a salvage value of $80,000 after its 2-year life. Process W will have a first cost of $1,350,000, an operating cost of $25,000 per year, and a $120,000 salvage value after its 4-year life. Process W will also require updating at the end of year 2 at a cost of $90,000. Which process should be selected on the basis of a future worth analysis at an interest rate of 12% per year?

Explanation / Answer

Process T Process W Cost 750000 1350000 Operating Cost 60000 25000 Salvage Value 80000 120000 Life 2 Years 4 Year End 2 Cost 90000 Process T Cost 750000 1 750000 Operating Cost 60000 1 1.69 101400 Salvage -80000 0.797 -63760 Net Outflows 787640 = 786740/1.69 466059.2 Process T Cost 1350000 1 1350000 Operating Cost 25000 1 3.038 75950 Year 2 Cost 90000 0.797 71730 Salvage Value -120000 0.635 -76200 Net Outflows 1421480 1421480/3.038 467899.9 Project T should be selected as annual cash outflow is less than project W

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