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 $36,000, an annual operating cost (AOC) of $10,000, and a service life of 2 years. Method B will cost $76,000 to buy and will have an AOC of $6,000 over its 4-year service life. Method C costs $127,000 initially with an AOC of $6,000 over its 8-year life. Methods A and B will have no salvage value, but Method C will have equipment worth 12% of its first cost. Perform a present worth analysis to select the method at i-14% per year. The present worth of method A is $153579 The present worth of method B is $ 148833 The present worth of method C is $ 4901 Method B #1 is selected

Explanation / Answer

PW of A =(-36000/((1+0.14)^0))-(10000/((1+0.14)^1))-(10000/((1+0.14)^2)) = -$52467

PW of B =(-76000/((1+0.14)^0))-(6000/((1+0.14)^1))-(6000/((1+0.14)^2))-(6000/((1+0.14)^3))-(6000/((1+0.14)^4)) = -$93482

PW of C =(-127000/((1+0.14)^0))-(6000/((1+0.14)^1))-(6000/((1+0.14)^2))-(6000/((1+0.14)^3))-(6000/((1+0.14)^4))-(6000/((1+0.14)^5))-(6000/((1+0.14)^6))-(6000/((1+0.14)^7))-(6000/((1+0.14)^8)) = -$154833

We need to select Method A as its PW is negatively lesser than PW of B and C

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