A granary has two options for a conveyor used in the manufacture of grain for tr

Question

A granary has two options for a conveyor used in the manufacture of grain for transporting, filling, or emptying. One conveyor can be purchased and installed for $80,000 with $3,000 salvage value after 16 years. The other can be purchased and installed for $90,000 with $2,000 salvage value after 16 years. Operation and maintenance for each is expected to be $21,000 and $15,000 per year, respectively. The granary uses MACRS-GDS depreciation, has a marginal tax rate of 40%, and has a MARR of 9% after taxes.

Determine which alternative is less costly, based upon comparison of after-tax annual worth.

Show the AW values used to make your decision:

Conveyor 1: $

Conveyor 2: $

Explanation / Answer

Answer:

Conveyor 1’s Annual Worth:

Life time: 16years

MARR: 9%

Initial cost: $80,000(A/P, 9%, 16)     = $9600

Salvage Value: $3,000(A/F 9%, 16) = $90

O & M costs: $21,000(P/A, 9%, 16) = $174,510

Tax rate: 40%     0.40(80,000)           = $32,000                                            

Now, AW of Conveyor 1 is: -9,600 – 174,510 -22,300 + 90

                                                                = - 206,320

Conveyor 2’s Annual Worth:

Life time: 16years

MARR: 9%

Initial cost: $90,000(A/P, 9%, 16)      = $10,800

Salvage Value: $2,000(A/F 9%, 16) = $60

O & M costs: $15,000(P/A, 9%, 16) = $124,650

Tax rate: 40%     0.40(90,000)           = $36,000                                            

Now, AW of Conveyor 2 is: -10,8 00 – $36,000-22,300 + 60

                                                                = -69040

The Conveyor 2’s Annual Worth is-69040 is less costly alternative.

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