Solution a. PW (present worth) method: Given that MARR (i) = 12%, Since we know

Question

Solution a. PW (present worth) method:

Given that MARR (i) = 12%,

Since we know that

PW = (CI) - ((AE) x[{(1+i)^n - 1} /{i x (1+i)^n}]) + SV x ([1/{1+i}^n])

where,

CI: capital investment

AE: annual operating expenses

SV: salvage value, which is zero here

i = MARR = 12%,

n =8 years life.

Now, putting respective values in above formula for each design

Design 1:

CI1 = - 525000;

AE = power + labour+maintenance +taxes/ insurance

AE1= (-168000-20000-345000-12000)

AE1 = - 545000,

hence, PW1 = - 525000-545000x[{1+0.12)^5 - 1} /{0.12x(1+0.12)^5}]

PW1 = - 525000 - (545000x0.762)/(0.12x1.762)

PW1 = - 525000 - 1964103

PW1 = - 2489103

Similarly,

PW2 = - 850000 - (420000x0.762)/(0.12x1.762)

PW2 = - 2363620

PW3 = - 1135000 - (630000x 0.762)/(0.12x1.762)

PW3 = - 3405431

and

PW4 = - 1420000 - (685000x0.762)/(0.12x1.762)

PW4= - 3888643

Now, we can conclude that PW2 is the lowest value, so design 2 should be selected by PW method.

Explanation / Answer

Can you please answer showing work with equation used instead ofusing excel or other programs to reach answer.

Caterpillar Inc. would like to upgrade current fabrication techniques on its Excavator assembly line. Upgrades include state of the art equipment designed to automate specific portions of fabrication which have been very labor intensive in the past. To meet current floor plan space, four equipment design alternatives have been considered, which will have capital investment and annual operating expenses as shown in the table below. Assuming a useful life of 8 years for each design, no end-of-life market (salvage) value, and a desired before-tax MARR of 12% per year, determine which design should be selected based on: a) the PW method, and b) the IRR method.

Design -525,000 Design 2 -850,000 Design 3 -1,135,000 Design 4 1,420,000 1 Capital investment Annual expenses: Power Labor Maintenance Taxes and insurance -168,000 -20,000 -345,000 -12,000 -180,000 -25,000 -200,000 -15,000 -220,000 65,000 -320,000 -25,000 -235,000 -50,000 370,000 -30,000

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