An electric switch manufacturing company is trying to decide between three diffe
ID: 2819935 • Letter: A
Question
An electric switch manufacturing company is trying to decide between three different assembly methods. Method A has an estimated first cost of $46,000, an annual operating cost (AOC) of $7,000, and a service life of 2 years. Method B will cost $86,000 to buy and will have an AOC of $3,500 over its 4-year service life. Method C costs $115,000 initially with an AOC of $6,000 over its 8-year life. Methods A and B will have no salvage value, but Method C will have equipment worth 12% of its first cost.
Perform a future worth analysis to select the method at i = 10% per year.
The future worth of method A is $ __________.
The future worth of method B is $ __________.
The future worth of method C is $ ___________.
Explanation / Answer
Lets evaluate each option one by one:-
1. Method A
Initial Cost = $46000
Annual cost = $ 7000
n(time) = 2 years.
Annual cost of project = Initial cost/Annuity factor(10 %,2) + Annual operating cost
46000/1.7355 (+) 7000 = 33505.
2. Machine B
Initial Cost = $86000
Annual cost = $ 3500
n(time) = 4 years.
Annual cost of project = Initial cost/Annuity factor(10 %,4) + Annual operating cost
86000/3.1699 (+) 3500 = 30630.
2. Machine C
Initial Cost = $115000
Annual cost = $ 8000, Salvage value = 12% of 115000 = 13800
n(time) = 8 years.
Annual cost of project = Initial cost/Annuity factor(10 %,4) + Annual operating cost - PV of Salvage value(10%,8)/n
115000/5.3350 + 8000 - 13800*0.46651/8 = 21555.76 + 8000 - 804.73 = 28751.03
Conclusion:- Sine the Annual cost or Future worth of C is lowest therefore we should choose Project C
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