For a MARR of 12%, which one of the two mutually exclusive machines should be se
ID: 2791726 • Letter: F
Question
For a MARR of 12%, which one of the two mutually exclusive machines should be selected? The increase in costs and benefits trend does not change when a new machine is put into action (The cost keep rising at 3% every year and the benefits increase by 7% every year for the 12 year project life). Machine A Machine B Initial cost $650,000 $276,000 Life in years 12 6 Salvage after life 12% 18% Benefits per year $134,000 $114,000 Costs per year $12,900 $16,800 Inflation 3% Increase in benefits 7% Machine A. Machine B. Either machine will be fine. None of the machine are good enough.
Explanation / Answer
Since EAB(annual benefit) under Machine A is higher than macnie B, Machine A is fine.
Machine A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Initial investment (650,000) Annual cash flows: Benefits 134,000 143,380 153,417 164,156 175,647 187,942 201,098 215,175 230,237 246,354 263,598 282,050 Costs (12,900) (13,287) (13,686) (14,096) (14,519) (14,955) (15,403) (15,865) (16,341) (16,832) (17,337) (17,857) 78,000 Net cash flow (650,000) 121,100 130,093 139,731 150,060 161,128 172,987 185,695 199,309 213,896 229,522 246,262 342,194 Discount rate@ 12.00% 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 0.2875 0.2567 Discounted cash flow (650,000.00) 108,125.00 103,709.34 99,457.76 95,365.58 91,428.13 87,640.75 83,998.80 80,497.70 77,132.90 73,899.93 70,794.37 87,832.56 NPV A 409,882.82 Annuity factor(6years,12%) B 6.1944 EAB A/B 66,170Related Questions
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