Question

(pts) Your company is considering buying a new, automated welding system. Using an ROR analysis and a MARR of 5% would you recommend the buy? Give the crad ROR and based on it the decision to buy/reiect the welding system. Hint: MARR percentage might be a good fint IC 260K - 260 O&M 20% ] vo 440 AB Periodic Maintenance Every 4 years Salvage tau 30K 20K 10 years Life 40 +40 JAD +40 30 +40 +20 PW-o - -200+v0 (P/4.1, 10) - 30 5.P/F, 2,4) -30 (PF. 22) +2012/F, c.10) Try 67 240+40( 7 36 1 - 5080.7921)-30/0.6224 +20 (o.ssay Try 77 0:-360+ 40 (-5.074)-70 ( 6 7629 )-30(1.5+20)+20€ 6.5083) FOR <67 Reject 2983 922

Use the formula below, and explain every step please. Don't use Excell, use the formula on the page.

Thank you!!

Answer 1

Initial Investment = 260,000

Annual O&M Cost = 20,000

Annual Benefits = 60,000

Net Annual Benefits = 60,000 – 20,000 = 40,000

Periodic maintenance at every 4 years = 30,000 (at 4^th year and at 8^th year)

Salvage Value = 20,000

Life = 10 years

MARR = 5%

Calculate the ROR and suggest whether to buy/reject the purchase of wielding machine.

Calculating ROR using Trial and Error Method.

Let the MARR is 5%

Calculate the PW of the investment at MARR of 5%

PW = -260,000 – 30,000 (P/F, 5%, 4) – 30,000 (P/F, 5%, 8) + 40,000 (P/A, 5%, 10) + 20,000 (P/F, 5%, 10)

PW = -260,000 – 30,000 (0.8227) – 30,000 (0.6768) + 40,000 (7.7217) + 20,000 (0.6139) = 16,161

The PW is positive. So, increase the rate of interest to get negative PW.

Increase the MARR to 6% and calculate the PW.

PW = -260,000 – 30,000 (P/F, 6%, 4) – 30,000 (P/F, 6%, 8) + 40,000 (P/A, 6%, 10) + 20,000 (P/F, 6%, 10)

PW = -260,000 – 30,000 (0.7921) – 30,000 (0.6274) + 40,000 (7.3601) + 20,000 (0.5584) = 2,987

The PW is still positive. So, increase the rate of interest to get negative PW.

Increase the MARR to 7% and calculate the PW.

PW = -260,000 – 30,000 (P/F, 7%, 4) – 30,000 (P/F, 7%, 8) + 40,000 (P/A, 7%, 10) + 20,000 (P/F, 7%, 10)

PW = -260,000 – 30,000 (0.7629) – 30,000 (0.5820) + 40,000 (7.0236) + 20,000 (0.5083) = -9,237

Now, use interpolation and calculate the IRR.

IRR = 6% + [2,987 – 0 ÷ 2,987 – (-9,237)] * 1%

IRR = 6.24%

As the IRR is greater than the given MARR, the decision should be to BUY the wielding machine.