7. An industrial firm uses an economic analysis to determine which of two differ

Question

7. An industrial firm uses an economic analysis to determine which of two different machines to purchase. Each machine is capable of performing the same task in a given amount of time. Assume the minimum attractive rate of return is 8%. Use the following data in this analysis. nitial cost Estimated life Salvage value Annual maintenance cost S150 Machine x Machine y S6000 $12,000 7 years 13 years none $4000 S175 Which, if either of the two machines should the firm choose based on equivalent uniform annual costs?

Explanation / Answer

Machine X:

Present value of annual maintenance cost : [PVA8%,7*A]

                      = [5.20637*150]

                       = 780.96

Total cost =Initial cost+Present value

        = 6000+780.96

        = $ 6780.96

Equivalent uniform annual cost =Total cost/ PVA8%,7

                =6780.96/5.20637

            = $ 1302.44

Machine Y:

Present value of annual cost /(benefit) =[PVA8%,13*AnnuaL cost]-[PVF8%,13*Salvage]

               =[7.90378*175]-[.36770*4000]

                 = 1383.16- 1470.8

                 = - 87.64

Total cost =12000-87.64

= 11912.36

Equivalent uniform annual cost =Total cost /PVA8%,13

         = 11912.36/ 7.90378

           = $ 1507.17

Machine X is better as it is lowest equivalent uniform cost.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.