An airport needs a modern material handling system for facilitating access to an

Question

An airport needs a modern material handling system for facilitating access to and from a busy maintenance hanger. A second-hand system will cost $70,000. A new system with improved technology can decrease labor hours by 15% compared to the used system. The new system will cost $160,000 to purchase and install. Both systems have a useful life of five years. The market value of the used system is expected to be $20,000 in five years, and the market value of the new system is anticipated to be $60,000 in five years. Current maintenance activity will require the used system to be operated 8 hours per day for 20 days per month. If labor costs $50 per hour and the MARR is 2% per month, which system should be recommended?

Explanation / Answer

Number of months = 5 x 12 = 60

Monthly Labor cost for used system = $50 x 8 x 20 = $8,000

Monthly Labor cost for new system = $50 x 8 x 0.85 x 20 = $6,800

We compute Present Worth (PW) of costs for both systems as follows.

PW, Used system ($) = 70,000 + 8,000 x PVIFA(2%, 60) - 20,000 x PVIF(2%, 60)

= 70,000 + 8,000 x 34.7609 - 20,000 x 0.3048 = 70,000 + 278,087 - 6,096

= 341,991

PW, New system ($) = 160,000 + 6,800 x PVIFA(2%, 60) - 60,000 x PVIF(2%, 60)

= 160,000 + 6,800 x 34.7609 - 60,000 x 0.3048 = 160,000 + 236,374 - 18,288

= 378,086

Since Used system has lower PW of net costs, this should be purchased.

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