Question

Question 3 (25 points) You have two machines under consideration for an imuroved automated wrapping process for Snickers Fun Size candy bars as detailed below. Using an annual worth analysis, determine which should be selected at i = 9% per year. First cost, $ Annual cost, $/year Salvage value, $ Life, years Life " value, 8 -80 - 30.000 -8.000 15,000 -55,00 -55,000 - 10.000 30,000

Answer 1

Annual worth = (NPV * r) / (1 - (1 + r)^-n),

where NPV = net present value.

r = discount rate.

n = life of machine in years.

NPV is calculated as the total of the present values of each year's cash flows.

Machine C

Cash outflow in year 0 = first cost.

Cash outflow in years 1 to 2 = annual cost.

Cash outflow in year 3 = annual cost.- salvage value (net cash inflow).

Machine D

Cash outflow in year 0 = first cost.

Cash outflow in years 1 to 5 = annual cost.

Cash outflow in year 6 = annual cost.- salvage value (net cash inflow).

Annual Worth of Machine C is -$15,275.82.

Annual Worth of Machine D is -$17,903.34.

Machine C should be selected as it has a lower annual cost .

fiC9*9%)/(1-(1+9%)^-3) C10 В C D E PV of Cash Cash Flow -C Flow - C (30,000) $ (8,000) $ (8,000)$ PV of Cash Cash Flow - D Flow - D (55,000) $(55,000) (9,174) 1 Year (30,000) $ 2 (7,339) $ (10,000) (6,733) $ (10,000) 5,405 (10,000) $ (10,000) $ $ (10,000) $ 3 2 S (8,417) 4 3 $ 7,000 $ (7,722) 5 $ (7,084) 6 4 (6,499) 7 5 20,000 $ 8 6 11,925 $(80,312.95) $(17,903.34) (38,667.61) (15,275.82) 9 NPV 10 AW

A C E 1 Year Cash Flow C PV of Cash Flow C Cash Flow D PV of Cash Flow D D2/(1+9% )^A2 =D3/(1+9%)^A3 D4/(1+9%)^A4 =D5/(1+9%)^A5 D6/(1+9%)^A6 =D7/(1+9% )^A7 =D8/(1+9%)^A8 -SUM(E2:E5) (E9*9% ) / ( 1-(1+9%)^-6) B2/(1+9%)^A2 B3/(1+9%)^A3 B4/(1+9%)^A4 =B5/(1+9% )^ A5 20 =-30000 =-55000 3 1 =-8000 -10000 4 2 =-8000 --10000 -8000+15000 5 3 --10000 6 4 --10000 7 5 -10000 6 -10000+30000 -SUM(C2:C5) |=(C9*9% ) /(1-(1+9%)^-3) 9 NPV 10 AW LO