A European candy manufacturing plant manager must select a new irradiation syste

Question

A European candy manufacturing plant manager must select a new irradiation system to ensure the safety of specific ingredients, while being economical. The two alternatives available have the following estimates:

The company is in the 35% tax bracket and assumes classical straight line depreciation for alternative comparisons performed at an after-tax minimum acceptable rate of return (MARR) of 6% per year. A salvage value of zero is used when depreciation is calculated; however, system B can be sold after 5 years for an estimated 14% of its first cost. System A has no anticipated salvage value. Determine which is more economical using an annual worth (AW) analysis worked by hand.

The annual worth analysis for system A is determined to be $ .......??

The annual worth analysis for system B is determined to be $  ........??

System  (Click to select)  B  A  is selected.

System A B First Cost, $ –145,000 –100,000 CFBT, $ per Year 60,000 20,000 Life, Years 3 5

Explanation / Answer

Annual worth analysis for system A

Annual worth analysis for system B

Thus system A should be selected

Particulars Amount CFBT 60000 Depreciation 48333 PBT 11667 Tax @ 35% 4083 PAT 7584 Add: Depreciation 48333 Annual cash flow 55917 PV of annual Cash flow
55917*PVIFA(6%,3years)
55917*2.6730 149466 PV of salvage Value 0 PV of initial cost 145000 NPV(a+b-c) 4466 Capital recovery factor
=1/PVIFA(6%,3years)
=1/2.6730 0.374 Equal annual worth(d*e) 1671

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