Question 5 3.00000 points Save Answer A local food canning plant is considering

Question

Question 5 3.00000 points Save Answer A local food canning plant is considering to purchase a tomato-peeling machine. The purchasing manager prepared the following proformas. If the the manager decides to use MARR of 12%, which machine is the best alternative based on present worth analysis? Hint: consider the least common multiple as the study period. Cash flow Initial cost Maintenance & operating costs $15,000 Annual benefits Salvage value Useful life, in years Machine A Machine B Machine C $52,000 $63,000 $67,000 $9,000 $12,000 $38,000 $31,000 $37,000 $13,000 $19,000 $22,000 4 6 12

Explanation / Answer

a. Machine A Machine B Machine C Annual benefit $       38,000 $       31,000 $       37,000 Maintenance and Operating costs $       15,000 $         9,000 $       12,000 Annual net benefit $       23,000 $       22,000 $       25,000 b. Machine A: Present value of annuity of 1 = (1-(1+0.12)^-4)/0.12 =      3.0373 Present Value of single 1 = (1+0.12)^-4 =         0.636 Present Value of net annual benefit $       23,000 x           3.0373 = $     69,859.03 Present value of salvage value $       13,000 x              0.636 = $       8,261.74 Total Present value of cash inflows $     78,120.77 Less:Initial Costs $     52,000.00 Net Present Value $     26,120.77 Machine B: Present value of annuity of 1 = (1-(1+0.12)^-6)/0.12 =      4.1114 Present Value of single 1 = (1+0.12)^-6 =      0.5066 Present Value of net annual benefit $       22,000 x           4.1114 = $     90,450.96 Present value of salvage value $       19,000 x           0.5066 = $       9,625.99 Total Present value of cash inflows $ 1,00,076.95 Less:Initial Costs $     63,000.00 Net Present Value $     37,076.95 Machine C: Present value of annuity of 1 = (1-(1+0.12)^-12)/0.12 =      6.1944 Present Value of single 1 = (1+0.12)^-12 =      0.2567 Present Value of net annual benefit $       25,000 x           6.1944 = $ 1,54,859.36 Present value of salvage value $       22,000 x           0.2567 = $       5,646.85 Total Present value of cash inflows $ 1,60,506.21 Less:Initial Costs $     67,000.00 Net Present Value $     93,506.21 Present Worth Machine A $ 26,120.77 Machine B $ 37,076.95 Machine C $ 93,506.21 Based on present worth analysis, Machine C is best alternative.

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