A chemical plant is concidering three different pieces of equipment to perform a

Question

A chemical plant is concidering three different pieces of equipment to perform a process within the plant. You have gathered the following data: =============== Machine 1 Machine 2 Machine 3 Initial Cost $150,000 $70,000 $39,000 Annual O/M $1,900 $8,500 $11,000 Salvage $18,000 $9,000 $5,500 Life Expectancy, years 6 4 3 Which machine would you recommend be purchased using an equivalent equal annual cost method? Interest rate is expected to be 8 percent. (O/M means operating and maintainance cost)

Explanation / Answer

machine 1:

PV = -150000 - 1900*PVIFA(8,6) + 18000/(1.08)^6

PV = -150000-8783.47+ 11343.05

PV = - 147440.42

Machine 2

PV = -70000 - 8500*PVIFA(8,6) + 9000/(1.08)^6

PV = -70000-39294.48+5671.53

PV = -103622.95

Machine 3

PV = -39000-11000*PVIFA(8,6) + 5500/(1.08)^6

PV = -39000-50851.68+3465.93

PV = -86385.75

the plant has to pay minimum amount for machine 3

so plant should buy machine 3

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