Final answer is -$1,453,892 Leonard, a company that manufactures explosion- proo

Question

Final answer is -$1,453,892 Leonard, a company that manufactures explosion- proof motors, is considering two alternatives for ex- panding its international export capacity. Option 1 requires equipment purchases of $900,000 now and $560,000 two years from now, with annual M&O; costs of $79,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning now through the end of year 10. Neither option will have a sig- nificant salvage value. Use a present worth analysis to determine which option is more attractive at the company's MARR of 20% per year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered recently.) 5.11

Explanation / Answer

Find the PW of the two options

PW of Option 1 = -900,000 - 560000(P/F, 20%, 2) - 79000(P/A, 20%, 10) = -900,000 - 560000*0.69444 - 79000*4.19247 = -1,620,092

PW of option 2 = -280,000 - 280,000(P/A, 20%, 10) = -280,000 - 280,000*4.19247  = 1,453,892

Since PW of option 2 is less costly, we choose Option 2

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