Machines that have the following costs are under consideration for a robotized a
ID: 1169622 • Letter: M
Question
Machines that have the following costs are under consideration for a robotized assembly process. Using an interest rate of 6% per year, determine which alternative should be chosen on the basis of a present worth analysis:
Machine A
Machine B
First cost ($)
200,000
150,000
Annual operating costs ($/yr)
50,000
60,000
Salvage value ($)
30,000
20,000
Life (years)
2
3
Machine A
Machine B
First cost ($)
200,000
150,000
Annual operating costs ($/yr)
50,000
60,000
Salvage value ($)
30,000
20,000
Life (years)
2
3
Explanation / Answer
Consider first Machine A
Present worth of machine An
PWA =-200000-50000(P|A, 0.06,2)+30000(P|F, 0.06,2)
=-200000-500000(1.834)+30000(0.8899)
=-265003
Now consider Machin B
PWB =-150000-60000(P|A, 0.06,3)+20000(P|F, 0.06,3)
=-150000-60000(16.66)+20000(0.839)
=-1132820
Therefore PWA>PWB
Hence chose machine A
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