Question 1: A company is considering replacing an existing machine with a new on

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Question 1: A company is considering replacing an existing machine with a new one which, if purchased, will save $6,500 per year for additional productivity as compare to the existing machine. The data of the new machine are sown below. Shall the company buy the new machine or not, assuming that the company's MARR is 10% per year. Machine A Initial capital investment $10,000 Salvage value $2,000 Study period 5 years Parts required per year 3,000 Labor cost per hour$20 Time to make one part 3 minutes Maintenance cost per year $1,000

Explanation / Answer

Annual labor cost for making parts = 3,000 x (3/60) x $20 = $3,000

Total annual cost ($) = Labor cost + Maintenance cost = 3,000 + 1,000 = 4,000

Annual net benefit ($)= Annual saving - Total annual cost = 6,500 - 4,000 = 2,500

Present Worth ($) = - 10,000 + 2,500 x P/A(10%, 5) + 2,000 x P/F(10%, 5)

= - 10,000 + 2,500 x 3.7908** + 2,000 x 0.6209**

= - 10,000 + 9,477 + 1,241.80

= 718.80

Since present worth of net benefits is positive, company should buy the machine.

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