Machines that have the following costs are under consideration for a robotized a
ID: 1169623 • Letter: M
Question
Machines that have the following costs are under consideration for a robotized assembly process. Using an interest rate of 8% per year, determine which alternative should be chosen on the basis of a present worth analysis:
Machine A
Machine B
First cost ($)
200,000
290,000
Annual operating costs ($/yr)
50,000
35,000
Salvage value ($)
100,000
145,000
Life (years)
2
4
Machine A
Machine B
First cost ($)
200,000
290,000
Annual operating costs ($/yr)
50,000
35,000
Salvage value ($)
100,000
145,000
Life (years)
2
4
Explanation / Answer
MACHINE - A
Present Worth ($) = 200,000 + [50,000 x Present Value Interest Factor of Annuity (8%, 2 years)] - [100,000 / (1.08)2]
= 200,000 + [50,000 x 1.7833 (From PVIFA table)] - 85,733.88
= 203,431
MACHINE - B
Present Worth ($) = 290,000 + [35,000 x Present Value Interest Factor of Annuity (8%, 4 years)] - [145,000 / (1.08)4]
= 290,000 + [35,000 x 3.3121 (From PVIFA table)] - 106,579.33
= 299,344.17
Since machine A has a lower present worth than machine B, machine A should be chosen.
Important Note: Here, we are choosing that alternative with lower present worth, because we are only dealing with the cost of machines. If we had to choose depending on how much net benefit the machines generated, we had to choose the option with the higher present worth.
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