An electric board manufacturing company has to choose one of three different pro
ID: 1160980 • Letter: A
Question
An electric board manufacturing company has to choose one of three different production lines A will have a first cost of $120,000, an anmu operating cost of $16,000, and a service life of 4 years. Line B first cost is $320,000 to buy and will have an annual operating cost of $4000 over its 8-year service life. Line C will cost $150,000 initially with an annual operating cost of $3000 over its 4-year life Lines A and C has no salvage values, but Line B will have salvage value of 15,000 after 8 years The interest rate of 5% per year The present worth of alternative A is The present worth of alternative B is The present worth of alternative C is Which Production line the company should select A PWA -$322,135.2 B PWA--$304 6272 c PWA $82,1352 D PWC -$292,794.6 ELine B F. Line C o PWB- -$339,084.8 H. PWCz-$300,847.2 I Line A PWB $337 6258Explanation / Answer
Use the common multiple method to convert the unequal life into equal life. The common multiple of 4 and 8 is 8. So here the common life of all the alternatives is 8 years.
Production Line
Present Worth
A
First Cost = 120,000
Annual Operating Cost = 16,000
Life = 4 years
Salvage Value = Nil
Interest = 5%
NPW = -120,000 - 120,000 (P/F, 5%, 4) - 16,000 (P/A, 5%, 8)
NPW = -120,000 - 120,000 (.8227) - 16,000 (6.463)
NPW = -322,135.2
A. PWA = -322,135.2
B
First Cost = 320,000
Annual Operating Cost = 4,000
Life = 8 years
Salvage Value = 15,000
Interest = 5%
NPW =- 320,000 - 4,000 (P/A, 5%, 8) + 15,000 (P/F, 5%, 8)
NPW = -320,000 - 4,000 (6.4632) + 15,000 (0.67684)
NPW = -335,700.2
None of the answer is correct. We can take the nearest answer J. -337,625.8
C
First Cost = 150,000
Annual Operating Cost = 3,000
Life = 4 years
Salvage Value = Nil
Interest = 5%
NPW = -150,000 - 150,000 (P/F, 5%, 4) - 3,000 (P/A, 5%, 8)
NPW = -150,000 - 150,000 ((.8227) - 3,000 (6.463)
NPW = -292,794.6
D. PWC = -292,794.6
Which production line the company should choose?
The company should choose production line C as it has the lowest cost.
Answer – F. Line C
Production Line
Present Worth
A
First Cost = 120,000
Annual Operating Cost = 16,000
Life = 4 years
Salvage Value = Nil
Interest = 5%
NPW = -120,000 - 120,000 (P/F, 5%, 4) - 16,000 (P/A, 5%, 8)
NPW = -120,000 - 120,000 (.8227) - 16,000 (6.463)
NPW = -322,135.2
A. PWA = -322,135.2
B
First Cost = 320,000
Annual Operating Cost = 4,000
Life = 8 years
Salvage Value = 15,000
Interest = 5%
NPW =- 320,000 - 4,000 (P/A, 5%, 8) + 15,000 (P/F, 5%, 8)
NPW = -320,000 - 4,000 (6.4632) + 15,000 (0.67684)
NPW = -335,700.2
None of the answer is correct. We can take the nearest answer J. -337,625.8
C
First Cost = 150,000
Annual Operating Cost = 3,000
Life = 4 years
Salvage Value = Nil
Interest = 5%
NPW = -150,000 - 150,000 (P/F, 5%, 4) - 3,000 (P/A, 5%, 8)
NPW = -150,000 - 150,000 ((.8227) - 3,000 (6.463)
NPW = -292,794.6
D. PWC = -292,794.6
Which production line the company should choose?
The company should choose production line C as it has the lowest cost.
Answer – F. Line C
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