Acme Semiconductor is expanding its facility and needs to add equipment. There a

Question

Acme Semiconductor is expanding its facility and needs to add equipment. There are three process tools under consideration. You have been asked to perform an economic analysis to select the most appropriate tool to acquire. You have gathered the following information for evaluation. Each of these tools has a useful life of seven years. Acme’s accounting staff has established a company-wide MARR of 8% per year. Which one of the process tools should be selected?

Tool A Tool B Tool C Investment costs $55,000 $45,000 $80,000 Annual expenses $6,250 $8,550 3,200 Annual revenue $18,250 $16,750 $20,200 Market value $18,000 $3,750 $22,000 15.9% 7.9% 14.6% IRR

Explanation / Answer

Answer:

The given MARR is: 8%, therefore, Tool B should not consider further since its IRR < 8%.

The Present Worth of Tool A may consider the following notation:

                PWA       = -$55,000 + ($18,250 - $6,250)(P/A, 8%, 7) + $18,000(P/F, 8%, 7)

                              = $17,980

The Present Worth of Tool C may consider the following notation:

                PWC       = -$80,000 + ($20,200 - $3,200)(P/A, 8%, 7) + $22,000(P/F, 8%, 7)

                              = $21,346

Thus, Tool A < Tool C

Therefore, we can choose Tool C

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