Dave Metal is examining two options – Machine A and Machine B – for a core-cutting machine. Machine A Initial Cost $ 250,000 Savings $28,000/year Maintenance Cost $10,000/year + $0.05/unit Labor $0.25/widget Life 10 years Salvage Value $22,500. Machine B Initial Cost $ 180,000 Savings $22,000/year Maintenance Cost $20,000 /year Labor $0.50/widget Life 5 years Salvage Value $ 17,000. MARR is 12 percent and the company’s sale projection is 30,000 widgets/year. Should either, both or neither machine be purchased? Use both present worth and annual worth comparisons.
First we compute the npv normally. To compute equivalent annual worth, divide the npv with the present value annuity factor@12% for the respective years of life of the machines.
|Less : maintenance cost||1-10||5.65022||10000+0.05 x 30000 = 11500||64977.53|
|Less : labour||1-10||5.65022||30000 x 0.25 = 7500||42376.65|
|Add: salvage vale||10||0.32197||22500||7244.325|
|Present value of cash inflows||58096.305|
|Less : initial cost||0||1||250000||250000|
Equivalent annual worth = (-)191903.695 / 5.65022 = (-)33963.93
|Less : maintenance cost||1-5||3.60478||20000||72095.60|
|Less : Labour||1-5||3.60478||0.50 x 30000 = 15000||54071.70|
|Add : Salvage value||5||0.56743||17000||9646.31|
|Present value of cash inflows||(-)37215.83|
|Less : initial cost||180000|
Equivalent annual worth = (217215.83) / 3.60478 = (-)60257.72
Machine A is better among the two as it’s equivalent annual worth is more. However, neither machine is recommended as both have a negative NPV and annual worth.