Question

O togineers (NOTE: ENTER YOUR ANSWER WITHOUT COMMA, ROUNDED TO THE NEAREST TON, for instance as 5824, not as 5,824.24. Do not round intermediate calculations) Tri-State Logistics is looking to purchase a new unloading robot for one of its sites. The choice is between machine A and machine B, with both machines lasting 6 years. Machine A would cost $75,000 to purchase, its operating cost would be $441 per ton of material unloaded, and it would be sold for $35,000 at the end of the 6 years. Machine B would cost $89,000 to purchase, its operating cost would be $298 per ton of material unloaded, and it would be sold for $39,000 at the end of 6 years. Assuming 9% interest rate, calculate the minimum annual number of tons of material unloaded, that would be required to choose machine 8 over machine A. Answer:

Answer 1

	Machine A	Machine B
Initial Investment	75000	89000
Useful Life (years)	6	6
Salvage Value	35000	39000
PVIF @ 9% for 6th year	0.7049605	0.7049605
PV of Salvage Value	24,673.62	27,493.46
Initial Investment net of PV of Salvage Value	50,326.38	61,506.54

Additional net cost for Machine B is $ 11,180.16.

Present value of per ton saving $143 (441-298) of machine B should offset this additional cost of 11,180.16 (This is PV of extra cost).

Thus annualised extra cost comes to $11,180.16 / 4.4859 = $ 2492.28  

PVIFA @ 9% for 6 years = 4.4859

Minimum Tons of material to be extracted = 2492.28 / 143 = 17.43 (Rounded off to 17 tons)