Your company is considering two options for replace meant of a piece of producti

Question

Your company is considering two options for replace meant of a piece of production equipment because it no longer meets quality requirements for the end product. The cash flows associated with the two best options are summarized in the table below. Perform an annual value analysis on the options and recommend one of the two options. Use an interest rate of 6 percentage. Round your answers to the neare dollar. a) What is the appropriate time frame for this study? b) Find the annual worth of each options. c) Base on the answers of , which option should you choose and why?

Explanation / Answer

Option -1 Cumulative discount fcator = (1-(1+i)^-n)/i i Interets rate Present value of initial cost = Initial cost*Discount factor = -14000 x 1 =         (14,000) = (1-(1+.06)^-5)/.06 n Years Present value of annual operating cost = Annual cost*Cumulative discount factor = -14000 x 4.212 =         (58,968) = 4.212 Present value of salvage = Salvage8Discount factor = 8000 x 0.747 =              5,976         (66,992) cumulative discount factor 4.212 Annual equivlent cost         (15,905) Option -2 Cumulative discount fcator = (1-(1+i)^-n)/i i Interets rate Present value of initial cost = Initial cost*Discount factor = -65000 x 1 =         (65,000) = (1-(1+.06)^-20)/.06 n Years Present value of annual operating cost = Annual cost*Cumulative discount factor = -9000 x 11.47 =       (103,230) = 11.47 Present value of salvage = Salvage8Discount factor = 13000 x 0.312 =              4,056       (164,174) cumulative discount factor 11.47 Annual equivlent cost         (14,313) Option-1 Option-2 Annual equivlent cost ($) 15905 14313 Due to lesser annual equivlent cost option-2 is better to invest

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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