Section 2 for Extra Credit: 10 points. You must get the entire answer correct to

Question

Section 2 for Extra Credit: 10 points. You must get the entire answer correct to score the 10 points for the question. You must show the calculations for numerical answers. Simply writing an answer into the answer box is not acceptable. (K)Your electronics firm has the two alternatives below for buying feeding trays for your pick and place assembly machine: Alternative 1 $14,000 $9,000 Alternative 2 $13,000 $7,000 6 = Capital Investment Annual Profits N- Useful life (years) Suppose that the capital investment of Alternative 1 is known with certainty because a supplier has already quoted its lowest price. Now you are negotiating with the supplier of Alternative 2 to get the best price for that option. The figure noted is the lowest price quoted so far for Alternative 2, but still not low enough to make this investment work for you, given the annual profits noted in the table. By how much would your supplier for Alternative 2 have to lower its price to make Alternative 2 as econom method. Your MARR is 12%. cally attractive as Alternative 1? Use the Annual Worth (AW) Answer Box

Explanation / Answer

As the alternatives have different useful lives, the 'Annual Worth' method should be used. Alternative 1 Alternative 2 AW of first cost: =14000*0.12*1.12^4/(1.12^4-1) = $        (4,609.28) = 13000*0.12*1.12^6/(1.12^6-1) = $       (3,161.93) Annual profits $          9,000.00 $         7,000.00 AW of the alternatives $          4,390.72 $         3,838.07 For Alternative 2 to be considered its AW should be atleast $4,390.72, for which the annual worth of the first cost should be not more than 7000.00-4390.72 = $2,609.28 The first cost should then be a maximum of 2609.28*(1.12^6-1)/(0.12*1.12^6) = $ 10,727.81 Henc the Supplier of Alternative 2 has to lower the price by aleast 13000-10727.81 = $    2,272.19 Answer: $2,272.19

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