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 $47,000, 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 present worth analysis to select the method at-8% per year. The present worth of method A is $ [-] The present worth of method B is $ . The present worth of method C is $ Method (Click to select) is selected.

Explanation / Answer

(1) PW, Method A ($) = 47,000 + 8,000 x P/A(8%, 2)

= 47,000 + 8,000 x 1.7833**

= 47,000 + 14,266.4

= 61,266.4

(2) PW, Method B ($) = 87,000 + 4,000 x P/A(8%, 4)

= 87,000 + 4,000 x 3.3121**

= 87,000 + 13,248.4

= 100,248.4

(3) Salvage value for Method C = $117,000 x 13% = $15,210

PW, Method C ($) = 117,000 + 6,500 x P/A(8%, 8) - 15,210 x P/F(8%, 8)

= 117,000 + 6,500 x 5.7466** - 15,210 x 0.5403**

= 117,000 + 37,352.9 - 8,217.96

= 146,134.94

(NOTE: We computed PW of all costs. If PW of benefits are required, all the answers should have a negative (-) sign).

(4) Since Method A has lowest PW of costs, Method A is selected.

**From P/A and P/F factor tables

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