AutoFoundry has contacted Centrifugal Casting Company about the purchase of mach

Question

AutoFoundry has contacted Centrifugal Casting Company about the purchase of machines for the production of (1) Babbitt bearings, and (2) diesel cylinder liners (engine sleeves). The cost of the machines prohibits AutoFoundry from purchasing both, so they decide to base their selection on which machine will provide the greatest net income on a ‘‘today’’ basis (also known later as a present worth basis). The bearing machine has a life of 5 years, after which it is expected to be replaced. It has ‘‘today’’ costs (considering first cost and 5 years of operating cost, maintenance, etc.) of $460,000 and provides new revenues over the 5 years of $730,000 in today’s dollars. The cylinder liner machine has a life of 9 years, with ‘‘today’’ costs and new revenues over the 9-year life of $650,000 and $990,000, respectively. What would you recommend that AutoFoundry do?

Explanation / Answer

Net Income of Bearing = 730000 -460000 = 270000, therfore, 54000 per year

Net Income of Cylinder = 990000 - 650000=340000, therefore, 37778

Assumption: figures are given at present value(Today values)

hence, Because period is not same for both proposals. so we cant compare their Present Values..

but on annual Basis.. Should go for First Project.

Thanks

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