Comparison of Alternatives: A-V Engineering Fabrication deals with large scale s

Question

Comparison of Alternatives: A-V Engineering Fabrication deals with large scale sophisticated rubber products, military hover craft skirts, inflatable fuel and water tanks A new plant has recently bring purchased. The new plant needs a computer controlled cutting machine There are two alternatives (0 a new cutting machine can be purchased, or (a) repair the vibration and noise problem of an existing machine upon. In order to fix the currently operating machine, it requires a new 'Sound Absorption' Curtain which cost $7,000 and few other parts replacements which is around $2000 Labor cost to fix the machine is around $9,000. The management is locking into the cost benefits of using either of the two options based on few alternatives costs analysis. Alternate-A calls for new machine which needs only shipping and installation costs. Alternate-B calls for the repairing an existing machine which require to purchase EasiWrap Acoustic Blanket System, few other parts and labor costs. The money is worth is 10 percent Estimated cost data for the two plans are as follows: Determine the Present worth to choose the best investment option: (i) purchasing a new machine or (ii) fixing the old machine, based on the values in the table below? Which alternative would you prefer?

Explanation / Answer

Present worth for new machine

= 88500+1500+2000

=92000

Present worth for fixing old machine

= 7000+9000+300

=16300

just based on the present cost incurred, Alternate B will be chosen over Alternate A because fixing old machines cost less than replacing old machine by new one

Now let us calculate the cost incurred for long term

operating cost after 10 years if new machine has been installed =12000*10=120000

operating cost after 10 years if fixing of old machine has been done = 15000*10=150000

updating cost for alternate B at the end of 10 years = 5000

so, the cost incurred at the end of 10 years is

Alternate A

= 92000+120000=212000

Alternate B

= 16300+150000+5000=171300

now it is given that the life of machine for Alternate A is 15 years and life of machine for Alternate B is 10 years

so, after completing 10 years

Alternate A will continue for 5 more years without investing anymore

Alternate B will fail and now new machine will be installed,

assuming that after 10 years all the costs for installing new machine will remain same, the cost incurred from 11th to end of 20th year is 212000.

so total cost incurred during 20 years if Alternate B will be chosen is 212000+171300=383300

now consider Alternate A again

Since, life of Alternate A is 15 yeras, so after 15 yeras machine will afil and new machine need to be installed.

Hence the cost incurred for time interval 15th to end of 20th year

=92000+12000*5=364000

Hence, comparing the cost incurred for both the Alternates, it can be observed that in long term, Alternate A will cost less. and hence Alternate A will be preferred.

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