Question

MECH 3360 Name: Lab 6 Set Student no. Two hammer mills are under consideration for installation in a gypsum mill. Machine A has a first cost of $18,000, no salvage value at the end of its 6 year life and annual operating costs of $10,000. Machine B costs $32,000 and has a salvage value of $8000 at the end of its 9 year life. Operating costs for Machine B are $8000 per year. Using the common multiple method, compare the two alternatives on the basis of their present worths using a minimum rate of return of 10%. Draw the cash flow diagrams for both alternatives.

Answer 1

The analysis will be carried for 18 yrs (LCM of 6 & 9)

NPW of A = -18000 - 10000 * (P/A, 10%,18) - 18000 * (P/F, 10%,6) - 18000 * (P/F, 10%,12)

= -18000 - 10000 * 8.201412 - 18000 * 0.564474 - 18000 * 0.318631

= -115910

NPW of B = -32000 - 8000 * (P/A, 10%,18) - (32000 - 8000)*(P/F, 10%,9) + 8000 * (P/F, 10%,18)

= -32000 - 8000 * 8.201412 - 24000*0.424098 + 8000 * 0.179859

= -106350.78

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

CFD of A

Net Cash Flow A 0.00 TWITTER ITT 101112131415161718 -5000.00 -10000.00 -15000.00 Net Cash Flow A -20000.00 -25000.00 -30000.00

CFD of B

Net Cash Flow B 9 10 11 12 13 14 15 16 17 18 -5000 -10000 -15000+ Net Cash Flow B -20000 -25000 -30000 -35000