You have two machines under consideration for an improved automated wrapping pro

Question

You have two machines under consideration for an improved automated wrapping process for Snick- 20 ers Fun Size candy bars as detailed below. (a) Using an AW analysis, determine which should be selected at 15% per year. Assume you want machine D to be selected and are willing to extend its estimated life, if necessary. Perform this analysis to ensure (b) D's selection using factors or a spreadsheet Machine First cost, S Annual cost, S/year Salvage value, S Life, years -40,000 -10,000 12,000 -65,000 -12,000 25,000 6 Solve it by excel

Explanation / Answer

In excel, use PV function to calculate the present worth of both machines

For C, PW = PV(rate = 15%, nper = 3, pmt = -10,000, fv = 12,000, 0) - 40,000 = -54,942.06

For D, PW = PV(rate = 15%, nper = 6, pmt = -12,000, fv = 25,000, 0) - 65,000 = -99,605.60

Annual worth (AW) can be calculated using PMT function

For C, AW = PMT(rate = 15%, nper = 3, pv = -54,942.06, fv = 0, 0) = $24,063.35

For D, AW = PMT(rate = 15%, nper = 6, pv = -99,605.60, fv = 0, 0) = $26,319.48

As machine C has lower AW, we select it.

C D First Cost -40,000 -65,000 Annual Cost -10,000 -12,000 Salvage 12,000 25,000 Life 3 6 PW -$54,942.06 -$99,605.60 AW $24,063.35 $26,319.48

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