The cash flows in the table below represent the potential annual savings associa

Question

The cash flows in the table below represent the potential annual savings associated with two different types of production? processes, each of which requires an investment of ?$32,000. Assume an interest rate of 7?%.

a)The equivalent annual savings for process A are $( )

b)The equivalent annual savings for process B are $( )

c)Determine the hourly savings for each process, assuming 2000 hours of operation per year.

d)which process should be selected

Process A $32,000 $18,290 $15,860 $13,430 $11,000 Process B $32,000 $18,200 $18,200 $18,200 $18,200 2 3 4

Explanation / Answer

a. Equivalent annual savings for process A: First I will compute the NPV of process A using a discount rate of 7%.

Equivalent annual savings for A = NPV of A/ P/A for 7%, 4 years = 18,300.92/3.3872 = $5,402.97

b. Process of B:

Equivalent annual savings for B = NPV of B/ P/A for 7%, 4 years = 29,647.24/3.3872 = $8,752.73

(c) Hourly savings for A = $5402.97/2000 hours = $2.70

Hourly savings for B = $8752.73/2000 hours = $4.38

As hourly savings for B is more hence B will be selected.

Year CF 1+r PVIF PV 0 -32,000.00 1.07 1.0000 -32,000.00 1 18,290.00 0.9346 17,093.46 2 15,860.00 0.8734 13,852.74 3 13,430.00 0.8163 10,962.88 4 11,000.00 0.7629 8,391.85 NPV 18,300.92

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.