Question

Required information Problem 14.056 The two machines shown are being considered for a chip manufacturing operation. Assume the MARR is a real return of 14% per year and that the inflation rate is 5.2% per year. -780.000 Machine First Cost. $ M&O. $ per year Salvage Value, $ Life, years -145,000 - 70.000 40,000 -5,000 200,000 Problem 14.056.b: Compare two alternatives based on their AW values with inflation consideration Which machine should be selected on the basis of an annual worth analysis if the estimates are in future dollars? What is the annual worth of the selected alternative? Select machine A The annual worth of the alternative is $

Answer 1

Annual worth of Machine A is -1,13,025

AWA

Cash Flow	PV factor 19.93%	Present Value
-145000	1.000	-1,45,000.00
-70000	2.995	-2,09,674.95
40000	0.403	16,123.42
Total Present Value		-338551.5324
Aw=Total Present Value/PVIFA 19.93% 5 =338551/2.995		-1,13,025

PVIFA =(1-(1+19.93%)^-5)/19.93%= 2.995

1(1+r)^n=1/(1+19.93%)^5= 0.403

Annual worth of Machine B= -780000(0.1993) – 5,000

if= 0.14 + 5.2% + (0.14)(5.2%) = 19.93%

=-165454

Hence Machine A should be selected ie Higher of A and B

Annual worth of Selected alternative is -1,13,025