Two storage structures, given code names Y and Z, are being considered for a mil

Question

Two storage structures, given code names Y and Z, are being considered for a military base located in Sontaga. The military uses a 5 percent/year expected rate of return and a 24-year life for decisions of this type. The relevant char-acteristics for each structure are shown below.

a. What is the present and future worth of each machine?

b. What is the decision rule for determining the preferred machine based on present worth ranking?

c. Which structure should be recommended?

First Cost Estimated Life Estimated Salvage Value Annual Maintenance Cost Structure Y $4,500 12 years None $1,000 Structure Z $10,000 24 years $1,800 $720

Explanation / Answer

(a)

(i) Present worth (PW) of costs ($):

Y: 4,500 + 1,000 x PVIFA(5%, 12) = 4,500 + 1,000 x 8.8633 = 4,500 + 8,863 = 13,363

Z: 10,000 + 720 x PVIFA(5%, 24) - 1,800 x PVIF(5%, 24) = 10,000 + 720 x 13.7986 - 1,800 x 0.3101

= 10,000 + 9,935 - 558

= 19,377

(ii) Future worth (FW) of costs ($):

Y = 4,500 x FVIF(5%, 12) + 1,000 x FVIFA(5%, 12) = 4,500 x 1.7959 + 1,000 x 15.9171 = 8,081 + 15,917

= 23,998

Z: 10,000 x FVIF(5%, 24) + 720 x FVIFA(5%, 24) - 1,800 = 10,000 x 3.2251 + 720 x 44.502 - 1,800

= 32,251 + 32,041 - 1,800

= 62,492

(b) Decision rule is: The structure with lower PW or FW of costs will be chosen.

(c) Structure Y should be chosen it has lower PW and FW.

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