Question

An international textile company's North America Division must decide which type of fabric cutting machines it will use-a straight knife or a round knife. The estimates are summarized below. Compare them on the basis of annual worths at i= 10%. Round Knife $-300,000 $-44,000 First Cost AOC, per Year Overhaul in Year 2 Salvage Value I | Straight Knife $-220,000 $-44,000 $-26,000 $13,000 4 years $44,000 6 years Life The (Click to select) 9 type of fabric cutting machine will be used by the company.

Answer 1

AW of round knife = -300000 * (A/P,10%,6) - 44000 + 44000 * (A/F,10%,6)

= -300000 *0.229607 - 44000 + 44000 *0.129607

= -107179.49

AW of straight knife = -220000 * (A/P,10%,4) - 44000 + 13000 * (A/F,10%,4) -26000 * (P/F,10%,2)*(A/P,10%,4)

= -220000*0.315471 - 44000 + 13000 *0.215471 -26000 *0.826446*0.315471

= -117381.21

As AW of round knife is less, it should be selected