Question

4.10 The costs associated with manufacturing a multifunction portable gas analyzer are estimated At an interest rate of 8% per year and a present worth analysis, which method should be selected? Manual Robotic First Costs -425,000 -850,000 M&O cost year 19 -90,000 -10,000 Increase in M&O, &/year 7,000 1,000 300,000 Salvage value $ 80,000 Life, Years

Answer 1

NPW of Manual method = -425000 - 90000 * (P/A, 8%,5) - 7000 * (P/G, 8%,5) + 80000 * (P/F, 8%,5)

= -425000 - 90000 * 3.992710 - 7000 * 7.372426 + 80000 * 0.680583

= -781504.23

NPW of Robotic method = -850000 - 10000 * (P/A, 8%,5) - 1000 * (P/G, 8%,5) + 300000 * (P/F, 8%,5)

= -850000 - 10000 * 3.992710 - 1000 * 7.372426 + 300000 * 0.680583

= -693124.57

As the net present cost of Robotic method is less, it should be selected