Question

A native company, makes tasty seafood dumplings and is considering two alternatives to automate its production process. The data are included below: Alt 1 Alt 2 WWMWAN WINNE Initial cost $42,500 $70,000 annual cost (o&m) $6,000 $4,000 Annual savings $18,500 $20,000 Residual value $12,000 $25,000 Useful life 3 years Recommend the alternative you find most attractive to this company. Do the analysis using the techniques of present net worth and annual equivalent value 6 years

Answer 1

In order to make them comparable, we need to use the method of least common multiple approach:

Expanding Alt 1 to 6 years of life and Making a cash outflow at year 3 to restart this alternative to make it comparable.

Using 10% as a discount rate-

ALT 1

Year	Cash Outlay	Cash Inflow	Net Cash Flow
0	42500		-42500
1	6000	18500	12500
2	6000	18500	12500
3	48500	30500	-18000
4	6000	18500	12500
5	6000	18500	12500
6	6000	30500	24500
			5%
	Net Present Worth	3,553.69

ALT 2

Year	Cash Outlay	Cash Inflow	Net Cash Flow
0	70000		-70000
1	4000	20000	16000
2	4000	20000	16000
3	4000	20000	16000
4	4000	20000	16000
5	4000	20000	16000
6	4000	45000	41000
		Dis rate	5%
	Net Present Worth		29866.46

Using the approach of Annual Equivalent Value or Equivalent Annual Annuity:

Year	Cash Outlay	Cash Inflow	Net Cash Flow
0	42500		-42500
1	6000	18500	12500
2	6000	18500	12500
3	6000	30500	24500
		Dis rate	5%
	NPV	1,906.65

Using a financial calculator to find AEV or EAA:

N=3

FV= 0

PV= -1906.65

I/Y= 5

CMPT PMT

EAA = 700.138

Year	Cash Outlay	Cash Inflow	Net Cash Flow
0	70000		-70000
1	4000	20000	16000
2	4000	20000	16000
3	4000	20000	16000
4	4000	20000	16000
5	4000	20000	16000
6	4000	45000	41000
		Dis rate	5%
	NPV		29866.46

Using a financial calculator to find AEV or EAA:

N=6

FV= 0

PV= 29866.46

I/Y= 5%

CMPT PMT

EAA = 5884.21

According to both the methods, ALT 2 is better