ENGINEERING ECONOMIC ANALYSIS CHAPTER 8 PR 19: The CROC Co may add a new milling
ID: 2779087 • Letter: E
Question
ENGINEERING ECONOMIC ANALYSIS CHAPTER 8 PR 19:
The CROC Co may add a new milling machine from among three alternatives; each has a life of 10 years.
A
B
C
FIRST COST
$220,000
$125,000
$75,000
Annual Benefit
79,000
43,000
28,000
Maintenance and Operating
38,000
13,000
8,000
Salvage Cost
16,000
6,900
3,000
a) Construct a truth table for interest rates from 0-100%.
b) Using 15% MARR, which alternative should be selected?
************PLEASE PROVIDE EXCEL FORMULAS IF TABLE IS USED FOR CALCULATIONS*******
I am having trouble doing this....
A
B
C
FIRST COST
$220,000
$125,000
$75,000
Annual Benefit
79,000
43,000
28,000
Maintenance and Operating
38,000
13,000
8,000
Salvage Cost
16,000
6,900
3,000
Explanation / Answer
CROC CO All amount in $ Alternative Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 A Initial Cost (220,000) Annual Benefit 79,000 79,000 79,000 79,000 79,000 79,000 79,000 79,000 79,000 79,000 Maint & Operating Cost (38,000) (38,000) (38,000) (38,000) (38,000) (38,000) (38,000) (38,000) (38,000) (38,000) Salvage Value 16,000 Total Cash Flow (220,000) 41,000 41,000 41,000 41,000 41,000 41,000 41,000 41,000 41,000 57,000 Interest rate k (between 0-100%) Discount factor with interest rate k 1 1/k 1/k^2 1/k^3 1/k^4 1/k^5 1/k^6 1/k^7 1/k^8 1/k^9 1/k^10 Present value of Cash Flow (220,000) =41000*1/k =41000*1/k^2 =41000*1/k^3 =41000*1/k^4 =41000*1/k^5 =41000*1/k^6 =41000*1/k^7 =41000*1/k^8 =41000*1/k^9 =57000*1/k^10 CROC CO All amount in $ Alternative Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 B Initial Cost (125,000) Annual Benefit 43,000 43,000 43,000 43,000 43,000 43,000 43,000 43,000 43,000 43,000 Maint & Operating Cost (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) Salvage Value 6,900 Total Cash Flow (125,000) 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 36,900 Interest rate k (between 0-100%) Discount factor with interest rate k 1 1/k 1/k^2 1/k^3 1/k^4 1/k^5 1/k^6 1/k^7 1/k^8 1/k^9 1/k^10 Present value of Cash Flow (125,000) =30000*1/k =30000*1/k^2 =30000*1/k^3 =30000*1/k^4 =30000*1/k^5 =30000*1/k^6 =30000*1/k^7 =30000*1/k^8 =30000*1/k^9 =36900*1/k^10 CROC CO All amount in $ Alternative Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 C Initial Cost (75,000) Annual Benefit 28,000 28,000 28,000 28,000 28,000 28,000 28,000 28,000 28,000 28,000 Maint & Operating Cost (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) Salvage Value 3,000 Total Cash Flow (75,000) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 23,000 Interest rate k (between 0-100%) Discount factor with interest rate k 1 1/k 1/k^2 1/k^3 1/k^4 1/k^5 1/k^6 1/k^7 1/k^8 1/k^9 1/k^10 Present value of Cash Flow (75,000) =20000*1/k =20000*1/k^2 =20000*1/k^3 =20000*1/k^4 =20000*1/k^5 =20000*1/k^6 =20000*1/k^7 =20000*1/k^8 =20000*1/k^9 =23000*1/k^10 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 b Discount factor with interest rate 15% 1 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 Alternative A Total Cash Flow (220,000) 41,000 41,000 41,000 41,000 41,000 41,000 41,000 41,000 41,000 57,000 Present value of Cash Flow (220,000) =41000*1/k =41000*1/k^2 =41000*1/k^3 =41000*1/k^4 =41000*1/k^5 =41000*1/k^6 =41000*1/k^7 =41000*1/k^8 =41000*1/k^9 =57000*1/k^10 Present value of Cash Flow (220,000) 35,652 31,002 26,958 23,442 20,384 17,725 15,413 13,403 11,655 14,090 NPV of cash flows (10,276) Alternative B Total Cash Flow (125,000) 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 36,900 Present value of Cash Flow (125,000) =30000*1/k =30000*1/k^2 =30000*1/k^3 =30000*1/k^4 =30000*1/k^5 =30000*1/k^6 =30000*1/k^7 =30000*1/k^8 =30000*1/k^9 =36900*1/k^10 Present value of Cash Flow (125,000) 26,087 22,684 19,725 17,153 14,915 12,970 11,278 9,807 8,528 9,121 NPV of cash flows 27,269 Alternative c Total Cash Flow (75,000) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 23,000 Present value of Cash Flow (75,000) =20000*1/k =20000*1/k^2 =20000*1/k^3 =20000*1/k^4 =20000*1/k^5 =20000*1/k^6 =20000*1/k^7 =20000*1/k^8 =20000*1/k^9 =23000*1/k^10 Present value of Cash Flow (75,000) 17,391 15,123 13,150 11,435 9,944 8,647 7,519 6,538 5,685 5,685 NPV of cash flows 26,117 So considering MARR of 15% , alternative B should be selected
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