Question

The following annual costs are associated with three new extruder machines being considered for use in a Styrofoam cup plant: Data X X-TRUD SUPR-X Useful Life, Years 17 13 First Cost $2,460,000 $2,330,000 $2,760,000 Salvage Value $93,000 $98,000 $84,000 Annual Benefit $100,000 $628,000 $712,000 M&O $77,000 $80,000 $55,000 M&O Gradient $14,000 $9,500 $10,500 00 The company's interest rate (MARR) is 7%. Which extruder should the Styrofoam company choose? Use Annual Cash Flow Analysis and provide the right reason. O Choosing SUPR-X is best because it has the highest Annual Benefit Choosing SUPR-X will maximize the EUAB-EAUC; its value is $-40,542 higher than X and $189,695 higher than X-TRUD. Choosing SUPR-X is best because it has the lowest M&O cost in yr1 Choosing SUPR-X will maximize the EUAB-EAUC; its value is $593,458 higher than X and $298,695 higher than X-TRUD.

would someone give the correct answer please?

Answer 1

First Cost and Salvage Value have to be annualized

	X	X-Trud	SUPR-X
First Cost	251,965.97	568,265.32	330,236.34	PMT(rate,years,first cost)
Salvage Value	3,015.54	17,041.29	4,170.67	PMT(rate,years,,first cost)

M&O gradient needs to be annualized

Years	X	PV	X-Trud	PV	SUPR-X	PV
1	77,000.00	71,962.62	80,000.00	74,766.36	55,000.00	51,401.87
2	91,000.00	79,482.92	89,500.00	78,172.77	65,500.00	57,210.24
3	105,000.00	85,711.28	99,000.00	80,813.49	76,000.00	62,038.64
4	119,000.00	90,784.53	108,500.00	82,774.13	86,500.00	65,990.44
5	133,000.00	94,827.16	118,000.00	84,132.37	97,000.00	69,159.66
6	147,000.00	97,952.31			107,500.00	71,631.79
7	161,000.00	100,262.71			118,000.00	73,484.47
8	175,000.00	101,851.59			128,500.00	74,788.17
9	189,000.00	102,803.48			139,000.00	75,606.79
10	203,000.00	103,194.91			149,500.00	75,998.22
11	217,000.00	103,095.14			160,000.00	76,014.85
12	231,000.00	102,566.76			170,500.00	75,704.04
13	245,000.00	101,666.29			181,000.00	75,108.57
14	259,000.00	100,444.67
15	273,000.00	98,947.76
16	287,000.00	97,216.83
17	301,000.00	95,288.89
Total PV		1,628,059.84		400,659.11		904,137.73

Annual Benefit is given as an annual stream

Now, the Total PV needs to be annualised

Total PV		1,628,059.84		400,659.11		904,137.73
Annual_M&O		166,754.34		97,717.03		108,180.85	PMT(rate, years, PV)

	X	X-Trud	SUPR-X
First Cost	251,965.97	568,265.32	330,236.34
Annual_M&O	166,754.34	97,717.03	108,180.85
Total Costs	418,720.32	665,982.35	438,417.19
Annual Benefit	100,000.00	628,000.00	712,000.00
Salvage Value	3,015.54	17,041.29	4,170.67
Total Benefits	103,015.54	645,041.29	716,170.67
Annual CF	-315,704.78	-20,941.06	277,753.48
Difference	593,458.26	298,694.54

O Choosing SUPR-X will maximize the EUAB-EAUC; its value is $593,458 higher than X and $298,695 higher than X-TRUD.