Question

An airport needs a modern material handling system for facilitating access to and from a busy maintenance hanger. A second-hand system will cost $75,000. A new system with improved technology can decrease labor hours by 25% compared to the used system. The new system will cost $140,000 to purchase and install. Both systems have a useful life of five years. The market value of the used system is expected to be $20,000 in five years, and the market value of the new system is anticipated to be $60,000 in five years. Current maintenance activity will require the used system to be operated 8 hours per day for 20 days per month. If labor costs $40 per hour and the MARR is 1% per month, which system should be recommended? Click the icon to view the interest and annuity table for discrete compounding when 1% per month. The PW of the difference between the old and new systems is Round to the nearest dollar.) Which system should be recommended? Choose the correct answer below. O New system O Old system

Answer 1

Computation of PW of Ussed System

Expected Use of Old Machine (Number of months) = 5 x 12 = 60 Month

Monthly Labor cost for used system ($40 x 8 Hours x 20 Day Per Month) = $6,400

PW, Used system ($) = 75,000 + 6400 x PVIFA(1%, 60) - 20,000 x PVIF(1%, 60)

=75000+6400*44.955-20000*0.55045= $351703

Computation of PW of New System

Monthly Labor cost for New system ($40 x 8 Hours*0.75 x 20 Day Per Month) = $4800

PW, New system ($) = 140,000 + 4,800 x PVIFA(1%, 60) - 60,000 x PVIF(1%, 60)

=140,000 + 4,800 x 44.955 - 60,000 x 0.55045 = $322757

Difference in PW= $351703-322757= $28946

Since PW of New System is less than old system, hence its advisable to replace the old machine