A new material handling equipment is being economically evaluated separately by
ID: 1225070 • Letter: A
Question
A new material handling equipment is being economically evaluated separately by two engineers. The first cost is $107,000, and salvage value of $35,000. Both engineers estimated that the revenues from the equipment will generate $27,000 per year. The engineers estimated the equipment life for 6 years. One estimated the MARR is 10% per year and the other estimated the MARR as 20%, use the PW to determine if these different estimates of the equipment life will change the decision to purchase the equipment.
Explanation / Answer
First Engineer:
Initial cost(P) = $107,000
Annual Revenue(A) = $27,000
Salvage Value(F) = $35,000
No. of Life(n) = 6 Years
Interest rate(i) = 10%
PW = -107,000 + 27,000(P/A, 10%, 6) + 35,000(P/F, 10%, 6)
= -107,000 + 27,000(4.3553) + 35,000(0.5645)
= -107,000 + 117,593.1 + 19,757.5
= $30,350.6
Second Engineer:
Initial cost(P) = $107,000
Annual Revenue(A) = $27,000
Salvage Value(F) = $35,000
No. of Life(n) = 6 Years
Interest rate(i) = 20%
PW = -107,000 + 27,000(P/A, 20%, 6) + 35,000(P/F, 20%, 6)
= -107,000 + 27,000(3.3255) + 35,000(0.3349)
= -107,000 + 89,788.5 + 11,121.5
= -$5490
Yes, if we take first engineer's decision, then the equipment should be purchased and if we take second engineer's decision, then the equipment should not be purchased , because the PW in case of first engineer is positive where as the PW in case of second engineer is negative.
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