I = 8%
Option A
Initial cost = 8000
Annual operating cost = 500
Annual Benefit = 5500
life = 2 years
As widget molder is required for 6 years, option A will be bought for total of 3 times (EOY0, EOY2 & EOY4)
Present worth for 6 years = -8000 + (5500-500) *(P/A, 8%,6) - 8000 *(P/F,8%,2) - 8000 *(P/F, 8%,4)
= -8000 + 5000*(P/A, 8%,6) - 8000 *(P/F,8%,2) - 8000 *(P/F, 8%,4)
= -8000 + 5000*4.622879 - 8000 *0.8573388 - 8000 *0.7350298
= 2375.45
Option B
Initial cost = 15000
Annual operating cost = 1250
Annual benefit = 7250
Life = 3 years
As widget molder is required for 6 years, option B will be bought for total of 2 times (EOY0 & EOY3)
Present worth for 6 years = -15000 + (7250 - 1250)*(P/A, 8%,6) - 15000 *(P/F,8%,3)
= -15000 + 6000*(P/A, 8%,6) - 15000 *(P/F,8%,3)
= -15000 + 6000*4.622879 - 15000 *0.7938322
= 829.79
Option A should be chosen as it has more present value
It is economic engineering question. Please calculate using net present analysis. Don’t use excel. Write clear...
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