need help on solving this engineering economy problem. thanks ISEN 3724 Engineer

Question

need help on solving this engineering economy problem. thanks

ISEN 3724 Engineering Eoonony Fall 2015 SITUATION Two alternatives for a margarita nixer are under consideration. One system, the Mixer-Plus has an initial cost of $6,000. The salvage value after 7 years is expected o be sz00. The operating costs including operator vages, routine maintenance, overhauls, etc, is expected to be 92,000 per year. It is expected that this machine wil1 encourage the purchase of an additional 50 drinks per veek costing $2.00 apiece ta produce and tor which 6.0a can be charged Alternatively, a completely computer controlled mixing ystm, the Master Blender, with an initial cost of $10,000 18 available. The operating costs including operator wages, routine maintenance, overhauls, etc. is expected to be 91,000 per year. The salvage value at the end of 14 years 1a s500. It this alternativo is used an additional 100 drinks per week is expected costing 1.00 apiece to produce and for which $8.00 can be charged. Assume either machine will be employed for S2 veeks per year. The nininum attractive rate of return Eor the business is 20% per year. 1.Which method should be selected based on an annual-worth analysis? Shou the AW for each alternative. 2. Which method should be selected based on a present-worth analysis? Show the PW for each alternative.

Explanation / Answer

Alternative 1

Annual Expenses = $2000

Annual Income = 4 x 50 x 52 = $10400

Annual Cash flow = 10400 – 2000 = $8400

Annual Worth = –$6000(A/P, 0.2, 7) + Annual Cash flow = –$6000(3.6) + 8400 = –$13200

As the Annual Worth is not greater than Zero the project is not profitable

Alternative 2

Annual Expenses = $1000

Annual Income = 7 x 100 x 52 = $36400

Annual Cash flow = 36400 – 1000 = $35400

Annual Worth = –$10000(A/P, 0.2, 14) + Annual Cash flow = –$10000(4.6) + 35400 = –$10600

As the Annual Worth is not greater than Zero the project is not profitable

The Annual Worth of the second alternative is higher than the first one, hence it should be selected.

For the present worth it is assumed that the first alternative is again purchased for 7 more years.

The Net present worth of the first alternative is more therefore it should be selected.

Alternative 1 Year Cashflow Present Worth NPW 0 -6000 -6000 31069.85 1 8400 7000 2 8400 5833.33 3 8400 4861.11 4 8400 4050.93 5 8400 3375.77 6 8400 2813.14 7 2400 669.80 8 8400 1953.57 9 8400 1627.98 10 8400 1356.65 11 8400 1130.54 12 8400 942.12 13 8400 785.10 14 8600 669.82

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