A company is considering purchasing a new CNC machine. The study period is 10 ye
ID: 1216420 • Letter: A
Question
A company is considering purchasing a new CNC machine. The study period is 10 years and the MARR is 15% per year. There are two options being considered with the following data:
Alternatives
A B
Initial cost $100,000 $160,000
Annual Expenses $30,000 $20,000
One-time expense at the end of 5 years $20,000
Market value at the end of 10 Years $10,000 $15,000
Using the Annual Worth method, determine which alternative should be selected?
Using the Internal rate of return method, which alternative should be selected?
Explanation / Answer
For Alternative A:
Present value of all cost = initial cost + present value of annual expenses + present value of one time expense - present value of the market value after 10 years
Present value of all cost = 100000 + 30000*(1-1/1.15^10)/.15 + 20000/1.15^5 – 10000/1.15^10
Present value of all cost = $258034.746
Let,
Equivalent annual worth = AW1
Present value of all cost = AW1*(1-1/1.15^10)/.15 =AW*5.0187
AW1 = 258034.746 / 5.0187
AW1 = $51414.658
For Alternative B:
Present value of all cost = initial cost + present value of annual expenses + - present value of the market value after 10 years
Present value of all cost = 160000 + 20000*(1-1/1.15^10)/.15 - 15000/1.15^10
Present value of all cost = $256667.601
Let,
Equivalent annual worth = AW2
Present value of all cost =AW2*(1-1/1.15^10)/.15 = AW2*5.0187
AW2 = 256667.601 / 5.0187 = $51142.248
Since, equivalent annual cost is less for alternative B in comparison to alternative A. Thus, alternative B will be selected.
Pl. put in data of benefits drawn from both the alternatives to calculate IRR.
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