A large food-processing corporation is considering using laser technology to spe

Question

A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato-peeling process. To implement the system, the company anticipates needing $2.5 million to purchase the industrial-strength lasers. The systems will save $1,200,000 per year in labor and materials. However, it will require an additional operating and maintenance cost of $275,000. Annual income taxes will also increase by $145,000. The system is expected to have a 10-year service life and will have a salvage value of about $225,000. If the company’s MARR is 10%, justify the economics of the project based on:

(a) PE method

(b) FE method

(c) AE method

Explanation / Answer

Solution:

a) PE Method:

(P/A, i%, n)

P = A [((1 + i)n - 1) / ( i (1+i)n )]

(P/F, i%, n)

P = F [(1 + i)-n]

PE (10%) = -2,500,000 + [1,200,000 - 275,000 - 145,000] (P/A, 10%, 10) + 225,000 (P/F, 10%, 10)

= -2,500,000 + 780,000 [((1 + 0.10)10 - 1) / (0.10 (1 + 0.10)10)] + 225,000 [(1 + 0.10)-10]

= -2,500,000 + 780,000 (6.1445) + 225,000 (0.3855)

= -2,500,000 + 4,792,712 + 86,738

= 2,379,451

b) FE method:

(F/P, i%, n)

F = P [(1 + i)n]

FE (10%) = 2,379,451 [(1 + 0.10)10]

= 2,379,451 (2.5937)

= 6,171,581

c) AE method:

(A/P, i%, n)

A = P [(i (1 + i)n) / ((1+i)n - 1)]

AE (10%) = 2,379,451 [(0.10 (1 + 0.10)10) / ((1 + 0.10)10 - 1)]

= 2,379,451 (0.1627)

= 387,249

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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