Question

A production manager wants to upgrade the manufacturing system by adding a new machine. He found that one of two machines can effectively be used; their cost data are given in Table Q3  below:

                                         Table Q3 Alternative Machines

Cost Element	M/C I	M/C II
First cost Anual Maintenance Operating cost/hr Useful life Salvage value	£150,000 £3000 £1.6 6 years £10,000	£250,000 £3500 £1.2 8 years £25,000

   Using an interest rate of 15%  per year compounded annually, answer the following:

1. What is the yearly working hours that make the two machines even? Comment.   [10 Marks]
2. Use the uniform annual costs to determine the more economical machine considering the machines work for 10 hrs/day, and 250 working hrs per year.  Comment on using the EUAW to make the comparison.   
3. Use the sum-of-year digits and declining balance depreciation approaches  to compare the depreciation charges over the 8-years life of machine II.   
4. Using the information in part (ii) above, if the MARR is 18%, which machine would be preferred?   

2. A service company works in a major international airport runs fleet vans to transport people inside the port. New vans cost $50,000 and depreciated at a declining balance rate of 30%. Due to the continuous work of the van, the maintenance costs amount to $3000 in the first year; and double each year the fan is used such that the maintenance costs of year t are twice that of year (t-1) for t = 2,3,..8.  Given a MAAR of 8%, find the economic life of a van

Answer 1

1.Yearly working hours that make the two machines even=13230 HOURS

	M/C 1	M/C11
Depreciation=(Initial cost-salvage value)/no of years	(150000-10000)/6 years =23333.33	(250000-25000)/8 =28125
Monthly maintenance	3000	3500
	$ 26333.33	$ 31625
Number of hours	X	X
Operating cost	$1.6x	$1.2x

Therefore at break even point hours

1.6x-1.2X= $5291.67

Therefore X=13229.175=13230 HOURS

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