Question

Problem 8-18 (10 points) - Ignore parts a & b of the problem shown in the text. Instead, answer parts a thru e below. Also, change the analysis period from 3 years to 4 years. Basically you will solve this problem four different times using the following four analysis methods using the numbering below you will see on the template. Then you will duplicate the analysis following instructions in parte after changing a value for one of the alternatives a. Incremental ROR (Chapter 8) b. Future Worth Analysis (Chapter 9) c. Payback Period (Chapter 9) d. Benefit Cost Ratio Analysis (Chapter 9) e. Now, copy and paste your first worksheet onto the second page of the worksheet. Change the First Cost for Company B to $35,000 and re-calculate your answers for alternatives a d above. Show your new answers in the fields shown on sheet 1 for part e. (a hint of sensitivity analysis here) f. Analyze your results from parts a thru e and summarize what you learned about these four methods

Answer 1

Answer:-

(c)Payback period analysis of widget machines offered by A,B,C companies

Payback period				(Amount in $)
S.NO	Particulars	Company A	Company B	Company C
A	First cost	15000	25000	20000
B	Maintenance and operating	1600	400	900
C	Annual benefit	8000	13000	9000
D	Net annual benefit(B+C)	6400	12600	8100
	Payback period in years (A/D)	2.34375	1.98412698	2.469135802

Since in this case payback period of widget machine offered by company B is lesser than offer made by company A,C.so we can accept the offer made by company B if we want to repay the amount in lesser time period.

(d)Benefit cost analysis of widget machines offered by A,B,C companies

Benefit cost ratio analysis				(Amount in $)
S.No	Particulars	Company A	Company B	Company C
A	First cost	15000	25000	20000
B	Maintenance and operating(amount*3years)	4800	1200	2700
C	Total cost	19800	26200	22700
D	Annual benefit(amount*3 years)	24000	39000	27000
E	Salvage value	3000	6000	4500
F	Total Benefit	27000	45000	31500
	Benefit cost ratio(F/C)	1.36363636	1.71755725	1.3876652

Since benefit to cost ration is more in offer made by company B than company A,C.So we can accept the offer made by company B.

(e)Payback period analysis of widget machines offered by A,B,C companies

Payback period				(Amount in $)
S.NO	Particulars	Company A	Company B	Company C
A	First cost	15000	35000	20000
B	Maintenance and operating	1600	400	900
C	Annual benefit	8000	13000	9000
D	Net annual benefit(B+C)	6400	12600	8100
	Payback period in years (A/D)	2.34375	2.77777778	2.469135802

Since in this case payback period of widget machine offered by company A is lesser than offer made by company B,C.so we can accept the offer made by company A if we want to repay the amount in lesser time period.

Benefit cost analysis of widget machines offered by A,B,C companies

Benefit cost ratio analysis				(Amount in $)
S.No	Particulars	Company A	Company B	Company C
A	First cost	15000	35000	20000
B	Maintenance and operating(amount*4years)	6400	1600	3600
C	Total cost	21400	36600	23600
D	Annual benefit(amount*4 years)	32000	52000	36000
E	Salvage value	3000	6000	4500
F	Total Benefit	35000	58000	40500
	Benefit cost ratio(F/C)	1.63551402	1.58469945	1.71610169

Since benefit to cost ration is more in offer made by company C than company A,B.So we can accept the offer made by company B,if we want to get more benefit.

F)In Question (b) if we want to repay the cost of widget in lesser period we should select lesser payback period option i,e.offer made by company B.

In question (c) if we want to get more benefit from the machine we should select the offer having more benefit to cost ratio i,e.offer made company B.

In question (e)if we want to repay the cost in lesser time period we can go for company A otherwise if we want to get more benefit we can go for offer made by company C.

Note

As in the question no present value factor is given we ignored the present value analysis.