Jay Distributors wanted to purchase a new piece of equipment and were considerin
ID: 2801053 • Letter: J
Question
Jay Distributors wanted to purchase a new piece of equipment and were considering two competing alternatives, X which costs $50,000 and Y which costs $65,000. Using the estimates given in the table below, perform a sensitivity analysis and determine the most economical alternative at a MARR of 16%.
Estimate
AOC
Salvage Value
Life (Yrs)
Equipment X
Optimistic
6000
8000
10
Equipment X
Most Likely
7500
10000
7
Equipment X
Pessimistic
8200
16000
5
Estimate
AOC
Salvage Value
Life (Yrs)
Equipment Y
Optimistic
4000
9000
10
Equipment Y
Most Likely
5250
14000
8
Equipment Y
Pessimistic
7500
20000
5
A) Equipment X
B) Both X and Y
C) Equipment Y
D) Varies with estimate
Estimate
AOC
Salvage Value
Life (Yrs)
Equipment X
Optimistic
6000
8000
10
Equipment X
Most Likely
7500
10000
7
Equipment X
Pessimistic
8200
16000
5
Explanation / Answer
Summary:
Answer: Option A
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Estimate Cost of Acquision Annual Operating Cost (AOC) Salvage Value Life (Yrs) Discounting Factor df(16%,life) P/v of Salvage Value cummulative discounting factor cdf(16%,life) p/v of AOC P/v of total cost (COA+P/v of AOC - P/v of Salvage value) Equivalent Annual Cost[P/v of total cost / cdf(16%,life)] Equipment X Optimistic 50,000 6,000 8000 10 0.2267 1,813 4.8332 28,999 77,186 15,970 Equipment X Most Likely 50,000 7,500 10000 7 0.3538 3,538 4.0386 30,289 76,751 19,005 Equipment X Pessimistic 50,000 8,200 16000 5 0.4761 7,618 3.2743 26,849 69,231 21,144 Equipment Y Optimistic 65,000 4,000 9000 10 0.2267 2,040 4.8332 19,333 82,293 17,026 Equipment Y Most Likely 65,000 5,250 14000 8 0.3050 4,270 4.3436 22,804 83,533 19,231 Equipment Y Pessimistic 65,000 7,500 20000 5 0.4761 9,522 3.2743 24,557 80,035 24,443
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