Air Links, a commuter airline company, is considering replacing one of its bagga

Question

Air Links, a commuter airline company, is considering replacing one of its baggage-handling machines with a newer and more efficient one. The current book I life of five years The new baggage-handling machine has a purchase price of $113,000 and an estimated useful life of seven years. It has an estimated salvage value of $40,000 and is expected to realize economic savings on electric power usage, labor, and repair costs and also to reduce the amount of damaged luggage. In total, an annual savings of $46,000 will be realized if the new machine is installed. The firm uses a 13% MARR. Using the opportunity cost approach, what is the ANNUAL EQUIVALENT WORTH of the preferred alternative? Ignore the effect of taxes and depreciation."

Explanation / Answer

Calculation of Annual Equivalent Worth: Particulars New Machine A Initial Investment Purchase Price -113000 Sale Value of Old Machine 15000 -98000 B Annual Cash Flows 46000 PVAF (13%, 7) 4.422610433 PV of Annual Cash Flows 203440.0799 C Terminal Cash Flow 40000 PVIF(13%, 7) 0.425060644 PV of Terminal Cash Flow 17002.42576 D NPV (A+B+C) 122442.5057 E PVAF(13%, 7) 4.422610433 F Annual Equivalent Worth (D/E) 27685.57338

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