Question

5 years ago, a multi-axis NC machine was purchased for the express purpose of machining large, complex parts used in commercial and military aircraft worldwide. It cost $350,000, had an estimated life of 15 years, and O&M costs of $50,000 per year. It was originally thought to have a salvage value of $20,000 at the end of 15 years but is now believed to have a remaining life of 5 years with no salvage value at that time. With business booming, the existing machine is no longer sufficient to meet production needs. It can be kept and supplemented by purchasing a new, smaller Machine S for $230,000 that will cost $33,000 per year for O&M, have a life of 10 years, and salvage value of $230,000(0.8) after t years. As an alternative, a larger, faster, and more capable Machine L can be used alone to replace the current machine. It has cash price without trade-in of $460,000, O&M costs of $70,000 per year, salvage value of $460,000(0.8) after t years, and a 15 year life. The present machine can be sold on open market for a maximum of $70,000, MARR is 20%, and the planning horizon is 5 years. a. Clearly show the cash flow profile for each alternative using a cash flow approach insider's viewpoint approach). Provide cash flow for year t=0, 3 and 5. Machine NC & S Machine L Cash flow Cash flow $ A . b. Using an EUAC and a cash flow approach (insider's viewpoint approach), decide which is the more favorable alternative. c. Clearly show the cash flow profile for each alternative using an opportunity cost approach (outsider's viewpoint approach). Provide cash flow for year t=0, 3 and 5. Machine NC & S Machine L Cash flow Cash flow AA d. Using an EUAC comparison and an opportunity cost approach (outsider's viewpoint approach), decide which is the more favorable alternative.

Answer 1

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

M N R Linkage (230,000) (33,000) (50,000) (33,000) (50,000) (33,000) (50,000) (33,000) (50,000) 13 Year, n 14 Machine NC & S 15 Purchase cost of machines 16 O&M Cost of machines 17 O&M Cost of existing machine 18 Salvage value of machines 19 Salvage value of existing machine 20 Net Cash flows 21 NPV 22 EUAC (33,000) (50,000) 75,366 D = 230,000 x 0.845 (83,000) (83,000) (7,634)| F = A + B + C + D +E Excel NPV formula Excel PMT formula (230,000) (83,000)| (83,000) (447,933) "=NPV(20%,P20:T20)+020 149,780 '=PMT(20%,5,021) (460,000) 70,000 24 Machine 25 Purchase cost of machine L 26 Proceeds from sale of existing machine 27 O&M Cost of machine L 28 Salvage value of machine L J = 460,000 x 0.845 29 Net Cash flows K = G+H+I+) 30 NPV Excel NPV formula 31 EUAC Excel PMT formula (70,000) (70,000) (70,000) (70,000) (70,000) 150,733 80,733 (70,000) (70,000) (390,000) (70,000) (70,000) (538,767) '=NPV(20%,P28:T28)+O28 180,153 '=PMT(20%,5,029)

Part (a)

Please see the yellow colored cells in the snapshot above. Your final answers will be as shown below. Figures in parenthesis, if any, mean negative values. All financials are in $.

t	Machine NC & S Cash flows	Machine L cash flows
0	(230,000)	(390,000)
3	(83,000)	(70,000)
5	(7,634)	80,733

Part (b)

NPVs and EUAC have also been calculated in the snapshot above. EUAC for machine NC & S = $ 149,780
< EUAC of Machine L = $ 180,153

Hence, machine NC & S is more favorable.

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Part (c)

O P Q R S T 0 1 2 3 4 5 (230,000) (70,000) IN 13 Year, n Linkage 14 Machine NC & S 15 Purchase cost of machine S 16 Proceeds lost from not selling the existing machine A1 17 O&M Cost of machines 18 O&M Cost of existing machine 19 Salvage value of machine s D = 230,000 x 0.845 20 Salvage value of existing machine 21 Net Cash flows F= A + A1+B+C+D+E 22 NPV Excel NPV formula 23 EUAC Excel PMT formula (33,000) (33,000) (50,000) (50,000) (33,000) (50,000) (33,000) (50,000) U (33,000) (50,000) 75,366 (83,000) (83,000) (7,634) (300,000) (83,000) (83,000) (517,933) '=NPV(20%,P20:T20)+O20 173,186 "=PMT(20%,5,021) | IL (460,000) 70,000 (70,000) (70,000) (70,000) (70,000) 25 Machine 26 Purchase cost of machine L 27 Proceeds from sale of existing machine 28 O&M Cost of machine L 29 Salvage value of machine 30 Net Cash flows 31 NPV 32 EUAC 150,733 80,733 (70,000) (70,000) J = 460,000 x 0.845 K = G+H+I+) Excel NPV formula Excel PMT formula (390,000) (70,000) (70,000) (538,767) "=NPV(20%,P28:T28)+028 180,153 '=PMT(20%,5,029)

t	Machine NC & S Cash flows	Machine L cash flows
0	(300,000)	(390,000)
3	(83,000)	(70,000)
5	(7,634)	80,733

Part (d)

NPVs and EUAC have also been calculated in the snapshot above. EUAC for machine NC & S = $  173,186
< EUAC of Machine L = $ 180,153

Hence, machine NC & S is more favorable.