The following costs are associated with three tomato-peeling machines being cons
ID: 2455497 • Letter: T
Question
The following costs are associated with three tomato-peeling machines being considered for use in a food canning plant.
Machine A Machine B Machine C
First cost $52,000.00 $63,000.00 $67,000.00
Maintenance & Operating Costs 15,000.00 9,000.00 12,000.00
Annual benefits 38,000.00 31,000.00 37,000.00
Salvage Value 13,000.00 19,000.00 22,000.00
Useful life in Years 4 6 12
If the canning company uses a MARR of 12% which is the best alternative? USE NPW to make your decision Note: Consider the least common multiple as the study period.
Explanation / Answer
Machine A
Machine B
Machine C
First Cost
52,000
63,000
67,000
Maintenance & Operating Costs
15,000
9,000
12,000
Annual benefits
38,000
31,000
37,000
Salvage Value
13,000
19,000
22,000
Useful life in Years
4
6
12
Machine A:
NPW4 = -$52,000 + ($ 38,000 - $ 15,000)(P/A, 12%, 4 ) + $ 13,000 (P/F, 12%, 4)
= -$52,000 + $ 69,851 + $ 8,262
= $26,113
NPW12 = NPW4 [1 + (P/F, 12%, 4 ) + (P/F, 12%, 8)]
= $26,113 [1+(1.12)-4 + (1.12)-8]
= $53,255
Machine B:
NPW6 = -$63,000 + ($ 31,000 - $ 9,000)(P/A, 12%, 6 ) + $ 19,000 (P/F, 12%, 6)
= -$63,000 + $ 90,442 + $ 9,625
= $37,067
NPW12 = NPW6 [1 + (P/F, 12%, 6 )]
= $37,067 [1+(1.12)-6 ]
= $55,846
Machine C:
NPW12 = -$67,000 + ($ 37,000 - $ 12,000)(P/A, 12%, 12 ) + $ 22,000 (P/F, 12%, 12)
= -$67,000 + $ 154,850 + $ 5,647
= $93,497
Machine C is correct choice.
Machine A
Machine B
Machine C
First Cost
52,000
63,000
67,000
Maintenance & Operating Costs
15,000
9,000
12,000
Annual benefits
38,000
31,000
37,000
Salvage Value
13,000
19,000
22,000
Useful life in Years
4
6
12
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