Iwo alemative machines will roduce the same producd, but one is capable of highe

ID: 1157493 • Letter: I

Question

Iwo alemative machines will roduce the same producd, but one is capable of higher quaity wo work which can be expected to return greater revenue. The following are relevant data. Determine which is the better alternative, assuming repeatability and using SL depreciation, an income tax rate of 42%, and an after-tax MARR of 10%. Machine A $21,000 11 years $3,000 $151,000 $138,000 Machine Capital investment Life Terminal BV (and MV) Annual receipts Annual expenses $35,000 7 years 5500 $183,000 $175,000 Click the icon to view the interest and annuity table for discrete compounding when the MARR s 10% per year ollar) Machine B Calculate the AW value for AWg(10%)-S (Ro Machine A ollar) Based on the AW values Enter your answer in each of the answer boxes w/ is the better alternative.

Explanation / Answer

Solution:

Given,

Machine A

Machine B

Capital Investment

$21000

$35000

Life

11 Years

7 Years

Terminal BV

$3000

$500

Annual receipts

$151000

$183000

Annual expenses

$138000

$175000

Also after tax MARR is 10% and income tax is 42%.

Now annual worth can be calculated by Computing AW of the original cost and add the AW of the salvage value.

After considering the above data the annual worth of machine A

AW (10%)= CR – A, where CR is the capital recovery and A is annual maintainance cost or expenses.

AWA (10%) = - P(A|P, i, n) + SV(A|F, i, n) – A

AWA (10%) = -21000(A|P, 10, 11) + 3000 (A|F, 10, 11) – (151000-138000)(1-.42)

AWA (10%) = -21000(.1(1.1)11/(1.111-1) + 3000 (.1/(1.111-1)) + 7540

=-21000(.285/1.85) + 3000 (.1/1.85) +7540

=-3235 + 162+ 7540 = 4467

The annual worth of machine A

AWB (10%) = -35000(A|P, 10, 7) + 500 (A|F, 10, 7) – (183000-175000)(1-.42)

= -35000(.1(1.1)7/(1.17-1) + 500 (.1/(1.17-1)) + 4640

=-35000(.194/0.94) + 500 (.1/0.94) + 4640

= -7223 + 53.19 + 4640 = -2583

On the basis of above calculation AWA> AWB .So, Select alternative A.