Question

A farm equipment manufacturer is considering two types of controllers for one part of its production facility. Alternative 1 will have an equipment cost of 590.001, an installation cost of $ 28.428. annual MRO costs of $ 17,006, and a $ 7,183 salvare value after 16 vears. Alternative 2 will have an initial cost of $170,000 (including installation, an annual operating cost of $35,000, and $10,000 salvage value after its 8 year life. At an interest rate of 14.9 per year, the annual worth of the alternatives one is closest to

Answer 1

initial cash outflow for alternative 1 -$ 118,429.00 annual M&O * present value annuity factor (14.9%, 16 periods) present value of annual M&O -$ 17,006.00 5.98414 -$ 101,766.34 salvage value present value factor (14.9%, 16 periods) present value of salvage value $ 7,183.00 0.10836 $778.37 present value of net cash flows 7 present value annuity factor (14.9%, 16 periods) annual worth of alternative one -$ 219,416.97 5.98414 -$ 36,666.40

for formulas and calculations, refer to the image below -

initial cash outflow for alternative 1 =-90001-28428 annual M&O -17006 * present value annuity factor (14.9%, 16 periods) |--PV(14.9%,16,1) = present value of annual M&O =D4*D5 * = salvage value present value factor (14.9%, 16 periods) present value of salvage value 7183 --PV(14.9%,16,0,1) =D8*D9 present value of net cash flows =D2+D6+D10 17 present value annuity factor (14.9%, 16 periods) |--PV(14.9%,16,1) annual worth of alternative one =D12/D13

In case you have any query, kindly ask in comments.