Question

3) A company that manufactures amplified pressure transducers is trying to decide between the machines shown below. Compare them on the basis of their present worth values, using an interest rate of 18% peryear. Show the present worth calculation for each alternative and clearly state which alternative should be selected based on the present worth analysis and why. (50 points) Variable Dual Speed Speed 250,000-224,000 First cost,S Annual operating cost, S/year-231,000-235,000 Overhaul in year 3, S Overhaul in year 4, S Salvage value, S 80,000 -60,000 50,000 10,000 e, years (Source: Blank and Tarquin) (Overhaul is a maintenance or repair. It is a one time expense in that specific year)

Answer 1

Calculating Present Value of Variable Speed Present value of annuity @ 18% for 6 years is 3.498 Present value factor at 4th year at 18% is 0.516 Present value factor at 6th year at 18% is 0.370 First Cost 2,50,000 8,08,038 30,960 18,500 10,70,498 Add: Annual operating cost (2,31,000 X 3.498) Add: Overhaul (60,000 X 0.516) (Less): Salvage Value (50,000 X 0.370) Present Value of Robot X Calculating Present Value of Dual Speed Present value of annuity @ 18% for 6 years is 3.498 Present value factor at 3rd year at 18% is 0.609 Present value factor at 6th year at 18% is 0.370 First Cost 2,24,000 8,22,030 48,720 3,700 10,98,450 Add: Annual operating cost (2,35,000 X 3.498) Add: Overhaul (80,000 X 0.609) (Less): Salvage Value (10,000 X 0.370) Present Value of Robot Y ariable Speed should be selected because it's present value is lower than Dual Speed