The Northwest Manufacturing Company is currently manufacturing one of its produc

Question

The Northwest Manufacturing Company is currently manufacturing one of its products on a hydraulic stamping-press machine. The unit cost of the product is $15, and 6,000 units were produced and sold for $18 each during the past year. It is expected that both the future demand of the product and the unit price will remain steady at 6,000 units per year and $18 per unit.
The old machine has a remaining useful life of three years. The old machine could be sold on the open market now for $4,600. Three years from now, the old machine is expected to have a salvage value of $1,200.
The new machine would cost $38,200, and the unit manufacturing cost on the new machine is projected to be $13. The new machine has an expected economic service life of five years and an expected salvage value of $5,700.
The appropriate MARR is 16%. The firm does not expect a significant improvement in technology, and it needs the service of either machine for an idefinite period. What is the ANNUAL EQUIVALENT WORTH of the preferred alternative? Ignore the effect of taxes and depreciation.

Explanation / Answer

Old Machine New Machine Sales per Unit $18 $18 Variable Cost ($15) ($13) Contribution Per Unit $3 $5 No. Of unit Sold 6000 6000 Total Contributtion $18,000 $30,000 PVF (16%,3yrs)/(16%,5Yrs) 2.246 3.274 Present Value   (A) $40,428 $98,220 Salvage Value Calculation Purchase of new and sell old   (B) $0 $4,600 Salvage Value At the end of machine $1,200 $5,700 PVAF 0.641 0.476 Present Salvage Value (C ) $769 $2,713 Net Cash inflow (A) + (B) +(c ) $41,197 $105,533 Less: Cash Outflow 0 $38,200 Net Cashflow $41,197 $67,333 Anuity Factor 2.246 3.274 Annual Equitlant Flow $18,342.39 $20,565.97 Purchase of new Machinery Best Option

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