Question

Required information The two machines shown are being considered for a chip manufacturing operation. Assume the MARR is a real return of 13% per year and that the inflation rate is 4.9% per year. Machine First Cost, $ M&0, $ per year Salvage Value, $ Life, years А -150,000 -70,000 40,000 B -800,000 -5,000 200,000 00 Which machine should be selected on the basis of an annual worth analysis if the estimates are in future dollars? What is the annual worth of the selected alternative? Select machine (Click to select) . The annual worth of the alternative is $

Answer 1

Market interest rate = 0.13 + 0.049 + 0.13 * 0.049 = 0.18537

AW of A = -150000 * (A/P,18.537%,5) - 70000 + 40000*(A/F,18.537%,5)

= -150000 *0.323676 - 70000 + 40000*0.138306

= -113019.16 ~ -113019

AW of option B = -800000 * 0.18537 - 5000

= -153296

As annual cost of A is less, it should be selcted

Select machine A

AW of alternative = -113019