11:12 Expert Q8A Done explosion- Leonard, a company that proof motors, is consid
ID: 1109900 • Letter: 1
Question
11:12 Expert Q8A Done explosion- Leonard, a company that 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.) The answer for option 2 should be -$1,453,892 do not solve it bv excel and spread sheetExplanation / Answer
Option 1
Cost of equipment purchased now (C1) = $900,000
Cost of equipment purchased two years from now (C2) = $560,000
Annual M&O cost = $79,000
Interest rate = 20%
Time period = 10 years
Calculate Present Worth -
PW = -C1 - C2(P/F, i, n) - Annual M&O cost(P/A, i, n)
PW = -$900,000 - [$560,000(P/F, 20%, 2)] - [$79,000(P/A, 20%, 10)]
PW = -$900,000 - [$560,000 * 0.6944] - [$79,000 * 4.192]
PW = -$900,000 - $388,864 - $331,168
PW = -$1,620,032
The present worth of Option 1 is -$1,620,032.
Option 2
Subcontracting cost = $280,000 per year
Time period = 10 years
Interest rate = 20%
Calculate present worth -
PW = -Subcontracting cost (P/A, i, n)
PW = -$280,000(P/A, 20%, 10)
PW = -$280,000 * 4.192
PW = -$1,173,760
The present worth of Option 2 is -$1,173,760
The present worth of Option 2 is numerically higher (in case of negative terms, lower is the greater).
Thus, the option 2 is more attractive.
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