# Solved Question: Dave Metal is examining two options

## Description

Question:

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.

Machine A

 Particulars Year PVF@12% Amount Present Value Savings 1-10 5.65022 28000 158206.16 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 Npv (-)191903.695

Equivalent annual worth = (-)191903.695 / 5.65022 = (-)33963.93

Machine B

 Particulars Year PVF@12% Amount Present Value Savings 1-5 3.60478 22000 79305.16 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 Npv (-)217215.83

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.

## Reviews

There are no reviews yet.