Problem 3 (40 pts) Your company needs to purchase a new heating system for its m
ID: 2783573 • Letter: P
Question
Problem 3 (40 pts) Your company needs to purchase a new heating system for its main headquarters, and is determine the most cost-efficient model. Although there will be associated expenses wi system, the net savings will offset these expenses. Using the standard company-wide MARR of 7%, the purchasing department has provided several alternatives, as shown below: th the new heating Brawndo Cyberdyne Alternative Initial Costs Annual Expenses Acme Boiler $43,000 S3200 $9700 $4300 Boiler $45,000 S3800 S10,800 $4500 Boiler $51,000 S3400 S11,000 $5100 9 Annual Savin Salvage Value Life, years [5 points] Draw an accurate cash flow diagram for the "baseline" alternative. Indicate why this is the baseline [35 points] Use the INCREMENTAL ERR approach to determine which mixer should be purchased. Assume the reinvestment rate is equal to the MARR. Be explicit in setting up your analysis step by step and explain your steps a) b)Explanation / Answer
Answer:
Acme boiler cash flow ($)
Initial cashoutflow=43000+3200=46200
Annual saving=9700
salvage value=4300
n=9 years
Annual cash inflow=9700 MRR=7%'
ERR=-Present value cashoutlfow+Present value of cash inflow(1+r)^n
=-46200+9700/(1+0.07)^1+9700/(1+0.07)^2+9700/(1+0.07)^3+9700/(1+0.07)^4+9700/(1+0.07)^5+9700/(1+0.07)^6+9700/(1+0.07)^7+9700/(1+0.07)8+(9700+4300)/1+0.07^9
=-46200+65536
=19336
Brwando bolier
Intial cash ouflow=45000+3800=48800
Annual saving=10800
Annual salavge value=4500
Reinvestment rate=7%
ERR incremntal=Present value of cashoutflow+presnt value of cashoutflow/(1+r)^n
=-48800+10800/(1+0.07)^1+10800/(1+0.07)^2+10800/(1+0.07)^3+10800/(1+0.07)^4+10800/(1+0.07)^5+10800/(1+0.07)^6+10800/(1+0.07)^7+10800/(1+0.07)^8+(10800+4500)/(1+0.07)^9
=-48800+146690
=97890
Cylinder bolier
Intial cost=51000 Annual saving=11000
Annual expense=51000+3400=54400
ERR=-54400+11000/(1+0.07)^1+11000/(1+0.07)^2+11000/(1+0.07)^3+11000/(1+0.07)^4+11000/(1+0.07)^5+11000/(1+0.07)^6+11000/(1+0.07)^7+11000/(1+0.07)^8+11000+5100/(1+0.07)^9
=-54400+150357
=95957
The best one amomg all the err icremnetal analysis is bolier c which will give maximum benefit.
(ends)
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