4. (30 pts) You are an IE working at the Pittsburgh distribution center for Thri

Question

4. (30 pts) You are an IE working at the Pittsburgh distribution center for Thriftco a large retail pharmacy chain. Thriftco is about to purchase a fleet of new fork trucks and is trying to decide between two different models - the Raymond 2090 and the Hyster 770A. Utilize the information below to answer the given questions . Thriftco runs their distribution center for two eight hour shifts, Monday to Friday . The Pittsburgh distribution center has an annual movement of 7.5 million feet per truck for their fork truck fleet. Operator wages are S14 per hour Thriftco uses a minimum attractive rate of return of 10% when considering capital nvestments Raymond 2090 0015 40 10 58000 8000 H Fuel cost (S per foot) Maintenance cost (S per day) Lifetime (yrs) Initial cost (S) Salvage value (S) yster 770A 0023 32 12 45000 6500 a. Conduct an economic analysis to determine which fork truck will be cheaper to use based on the given information b. What costs are likely to change over time? What would be the impact of those costs changing? (Don't repeat the economic analysis - merely comment on their effects.) c. What other factors (not mentioned in the problem) would be important to consider in the economic analysis?

Explanation / Answer

a) Economic analysis is as follows

Raymond 2090

Annual fuel cost = 7.5 m feet * 0.0015 = $ 11250

Annual maintenance cost = $ 40 per day * 5 days per week * 52 weeks = $ 10400

Compound interest factors,

(P/A, 10%, 10) = ((1+10%)^10 - 1)/(10%*(1+10%)^10) = 6.145

(P/F, 10%, 10) = 1/(1+10%)^10 = 0.3855

Net Present Value = -58000 - (11250+10400)*(P/A, 10%, 10) + 8000*(P/F, 10%, 10)  

= -58000 - 21650*6.145 + 8000*0.3855

= -187,955

Hyster 770A

Annual fuel cost = 7.5 m feet * 0.0023 = $ 17250

Annual maintenance cost = $ 32 per day * 5 days per week * 52 weeks = $ 8320

Operator wage cost per year = $ 14 per hour * 8 hours per shift * 2 shifts per day * 5 days per week * 52 weeks per year = $ 58,240

Compound interest factors,

(P/A, 10%, 12) = ((1+10%)^12 - 1)/(10%*(1+10%)^12) = 6.814

(P/F, 10%, 12) = 1/(1+10%)^12 = 0.3186

Net Present Value = -45000 - (17250+8320)*(P/A, 10%, 12) + 6500*(P/F, 10%, 12)  

= -45000 - 25570*6.814 + 6500*0.3186

= -217,163

NPV of Raymond 2090 is less negative. Therefore, it will be cheaper to use

(in the above analysis, operator wage cost is ignored, because it is same for both the fork trucks. Therefore, does not affect the analysis)

b) Fuel costs, maintenanace costs and operator wage cost are likely to change over time. These costs are likely to increase over time and hence the NPV will become still more negative as these costs increase. If these cost of one truck change more rapidly than the other, then the result of the analysis might change.

c) The other factors that are important to consider are the efficiency and reliability of equipment. Availability of spare parts over the life of the equipment is also an important factor that needs to be considered while making a decision.

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