Question

The Ajax Corporation manufactures compressors for commercial air conditioning systems. A new compressor design is being evaluated as a potential replacement for the most frequently used unit. The new design involves major changes that have the expected advantage of better operating efficiency. From the perspective of a typical user, the new compressor would have an increased investment of RM8,600 relative to the present unit, and an annual expense saving dependent upon the extent to which the design goal is met in actual operations Estimates by the multidisciplinary design team of the new compressor achieving four levels (percentage%) of the efficiency design goal, the probability and annual expense saving at each level are shown in Table Q4(b) Based on a before-tax analysis (MARRs18% per year, analysis period-6 years, and salvage value-0) and E(PW) as the decision criterion, is the new compressor design economically preferable to the current unit? Provide single-state decision tree diagram with PW values for each level for the design alternatives Jadual S4(b)/Table Q4(b Tahap Matlamat Rekabentuk Tercapai (%) Penjimatan Perbelanjaan Tahuna Annual Expense Savin Kebarangkalian Probability 0.25 0.40 0.25 0.10 Level of Design Goal Met 90 70 50 30 RM3,470 RM2,920 RM2,310 RM1.560 (7 markah/marks)

Answer 1

Answer:

Given Initial Investment I=RM 8600

Before Tax MARR r=18%

Salvage value C=$0

Life of project = 6 years

PV of annual Saving A=S*(1-(1+r)^-n)/r

S=Annual saving

r= MARR

n= life of project

PV of expected saving = Probability * PV of annual saving

Sample calculation for design goal 90%

S=RM 3470

r=18%

n=6 years

Pv of Anual saving =3470*(1-(1+18%)^-6)/18%= RM 12136.68

PV of expected saving = 12136.68*0.25=RM 3034.17

Design Goal	Probability P	Annual Saving S	PV of Annual Saving A	PV of Expected saving =A*P
90%	0.25	3470	12136.68	3034.17
70%	0.4	2920	10213.00	4085.20
50%	0.25	2310	8079.46	2019.87
30%	0.1	1560	5456.26	545.63
			Total	9684.86

for economically viable for this project NPV >0

NPV= Sum of PV of all Expected saving -initial investment=9684.86-8600=RM 1084.86

Since NPV is greater than 0 So this project is economically viable.