Required information An electric switch manufacturing company is trying to decid

Question

Required information An electric switch manufacturing company is trying to decide between three different assembly methods. Method A has an estimated first cost of $47000, an annual operating cost (AOC) of $8,000, and a service life of 2 years. Method B will cost $87,000 to buy and will have an AOC of $4,000 over its 4-year service life. Method C costs $117,000 initially with an AOC of $6,500 over its 8-year life. Methods A and B will have no salvage value, but Method C will have equipment worth 13% of its first cost. Perform a future worth analysis to select the method at i The future worth of method A is The future worth of method B is $ The future worth of method C is $ Method (Click to select) # ) is selected. 8% per year.

Explanation / Answer

Service life of the three methods is not same.

So, we have to use LCM method to calculate future worth.

Service life of Method A = 2 years

Service life of Method B = 4 years

Service life of Method C = 8 years

The LCM of 2, 4, and 8 is 8

This means that Method A will be replaced by similar equipment for three more times. Method B will be replaced by similar equipment by one more time.

Calculate the Future Worth of Method A -

Future Worth = -$47,000(F/P, 8%, 8) - $8,000(F/A, 8%, 8) - $47,000(F/P, 8%, 6) - $47,000(F/P, 8%, 4) - $47,000(F/P, 8%, 2)

Future Worth = (-$47,000 * 1.8509) - ($8,000 * 10.6366) - ($47,000 * 1.5869) - ($47,000 * 1.3605) - ($47,000 * 1.1164)

Future Worth = -$86,992.3 - $85,092.8 - $74,584.3 - $63,943.5 - $54,820.8

Future Worth = -$365,433.7

The Future Worth of Method A is -$365,433.7

Calculate the Future Worth of Method B -

Future Worth = -$87,000(F/P, 8%, 8) - $4,000(F/A, 8%, 8) - $87,000(F/P, 8%, 4)

Future Worth = (-$87,000 * 1.8509) - ($4,000 * 10.6366) - ($87,000 * 1.3605)

Future Worth = -$161,028.3 - $42,546.4 - $118,363.5

Future Worth = -$321,938.2

The Future Worth of Method B is -$321,938.2

Calculate the Future Worth of Method C -

Future Worth = -$117,000(F/P, 8%, 8) - $6,500(F/A, 8%, 8) + $15,210

Future Worth = (-$117,000 * 1.8509) - ($6,500 * 10.6366) + $15,210

Future Worth = -$216,555.3 - $69,137.9 + $15,210

Future Worth = -$270,483.2

The Future Worth of Method C is -$270,483.2

Future Worth of Method C is numerically higher.

So,

Method C is selected.

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