9. Two processes can be used for producing a polymer that reduces friction loss
ID: 1109781 • Letter: 9
Question
9. Two processes can be used for producing a polymer that reduces friction loss in engines. Process T will have a fi rst cost of $750,000, an operating cost of $60,000 per year, and a salvage value of $80,000 after its 2-year life. Process W wil have a fi rst cost of $1,350,000, an operating cost of S25,000 per year, and a S120,000 salvage value after its 4-year life. Process W will also require updating at the end of year 2 at a cost of $90,000 Which process should be selected on the basis of a future worth analysis at an interest rate of 12% per year?Explanation / Answer
(9)
Future worth (FW) of costs for both processes is computed as follows.
FW, Process T ($) = 750,000 x F/P(12%, 2) + 60,000 x F/A(12%, 2) - 80,000
= 750,000 x 1.2544 + 60,000 x 2.1200 - 80,000 = 940,800 + 127,200 - 80,000
= 988,000
FW, Process W ($) = 1,350,000 x F/P(12%, 4) + 25,000 x F/A(12%, 4) + 90,000 x F/P(12%, 2) - 120,000
= 1,350,000 x 1.5735 + 25,000 x 4.7793 + 90,000 x 1.2544 - 120,000 = 2,124,225 + 119,483 + 112,896 - 120,000
= 2,236,604
Since Process T has a lower FW of costs, this should be selected.
NOTE: As per Chegg answering guidelines, only 1st question has been answered.
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