QUESTION is currently manufacturing one of its products on a hydraulic stamping-

Question

QUESTION is currently manufacturing one of its products on a hydraulic stamping-press machine. The unit cost of the product is $10 and 6,000 units were produced and sold for $22 each during the past year. It is expected that both the future demand of the product and the unit price will remairn at 6,000 units per year and $22 per unit. useful life of three years. The old machine could be sold on the open market now for $5,000. Three years from now, the old The old machine has a machine is expected to have a salvage value of $1,000. The new machine would cost $41,900, and the unit manufacturing cost on the new machine is projected to be $9. The new machine has an expected economic service life of five years and an expected salvage value of $6,000 The appropriate MARR is 12%. The firm does not expect a significant improvement in technology, and it needs the service of either machine for an id finite period. What is the ANNUAL EQUIVALENT WORTH of the preferred alternative? Ignore the effect of taxes and depreciation.

Explanation / Answer

Recomendation : Old Machine Annulized cash out flow is lower than New Machine. Therefore Old Machine should adopted.

Particulars Old Machine New Maching 1.Purchase Cost 5000 41900 2.Life of Machine (Years) 3 5 3.Running Cost of Product 60000(6000*10) 54000(6000*9) 4.Cumulative Present Value Factor 1-3 Years @ 12% 2.4019 5.Cumulative Present Value Factor 1-5 years @12% 3.6048 6.Present Value Cost of Product 144,114(3*4) 194659(3*5) 7.Cash outflow of Machine (7=1+6) 149114 236559 8.Less: Cash Inflow (Salvage Value) 712(1000*0.7118(PVF @ 12% for 3rd Year) 3404(6000*0.5674(PVF @ 12% for 5th year) 9.Net Cash Outflow (9=7-8) 148402 233155 10.Equivalent Present Value of annual cash outflow 61,785.25(10 = 9/4) 64679.04(10=9/5)

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