Two machines are being considered for improving a process. Machine A has a first

Question

Two machines are being considered for improving a process. Machine A has a first costs of $300,000 and annual maintenance and operating costs (M&O;) of $100,000 and it will result in costs reductions of 180,000 per year. Machine B has a first costs of $400,000 and annual maintenance and operating costs (M&O;) of $200,000 and it will result in costs reductions of $300,000 per year Use a six-year study period and assume both machines A or B have no salvages. Determine which Machine should be selected on the basis of rate of return if the MARR is 10%per year compounded annually.

Explanation / Answer

Machine A has better NPV than Machine B, Hence Machin A should be selected

Machine A : Year Cost Savings Total DCF @ 10% NPV 0 -300000 0 -300000 1.000 -300000 1 -100000 180000 80000 0.909 72727 2 -100000 180000 80000 0.826 66116 3 -100000 180000 80000 0.751 60105 4 -100000 180000 80000 0.683 54641 5 -100000 180000 80000 0.621 49674 6 -100000 180000 80000 0.564 45158 Total 48421 Machine B : Year Cost Savings Total DCF @ 10% NPV 0 -400000 0 -400000 1.000 -400000 1 -200000 300000 100000 0.909 90909 2 -200000 300000 100000 0.826 82645 3 -200000 300000 100000 0.751 75131 4 -200000 300000 100000 0.683 68301 5 -200000 300000 100000 0.621 62092 6 -200000 300000 100000 0.564 56447 Total 35526

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