2. Two methods are under consideration for producing the case for a portable haz

Question

2. Two methods are under consideration for producing the case for a portable hazardous material photoionization monitor. A plastic case will require an initial investment of $75,000 and will have an annual operating cost of $27,000 with no salvage after 2 years. An aluminum case will require an investment of $125,000 and will have annual costs of $12,000. Some of the equipment can be sold for $30,000 after its 3-year life. At an interest rate of 10% per year, which case should be used on the basis of a present worth analysis? (35 points)

Explanation / Answer

Equivalent cost is less under aluminium case, hence it is preferred.

Plastic case Year 0 Year 1 Year 2 Investment 75,000.00 Operating cost 27,000.00 27,000.00 Total cost 75,000.00 27,000.00 27,000.00 Discountingfactor@ 10% 1 0.909091 0.826446 Discounted cash flow 75,000.00 24,545.45 22,314.05 NPV 121,859.50 Annuity factor 2year 1.7355372 Equivalent cost 70,214.29

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