A new production system for a factory is to be purchased and installed for $177,896. This...

A new production system for a factory is to be purchased and installed for $177,896. This system will save approximately 300,000 kWh of electric power each year for a 6-year period. Assume the cost of electricity is $0.10 per kWh, and factory MARR is 15% per year, and the salvage value of the system will be $9,551 at year 6. Using the AW method to analyzes if this investment is economically justified

A- calculate the AW of the above investment and insert the result below.

Expert Solution

As per the information given in the question,

The purchase and installation cost (I) of the new production system =$177896

The approximated annual savings of electricity by the new production system = 300000kwh

Cost of electricity is =$0.10 per kwh

The annual savings of electricity (A) by the new production system = 300000x0.10= $30000

Salvage value of the system(S) =$9551

Useful life of the new production system(N)=6years

MARR=15%

Cash outflow are shown with negative sign and cash inflow are shown with positive sign

Annual worth (AW)= -$177896(A/P,15%,6)+ $30000 + $9551(A/F,15%,6)

Annual worth (AW)= -$177896(0.26424)+ $30000 + $9551(0.11424)

Annual worth (AW)= -$47007.24+ $30000 + $1091.11=-$15916.13

The annual worth of the new production system is =-$15916.13

Since the net annual worth of the new production system is negative it is not economical to select the new production system. So it is not economically justified.

Rahul Sunny answered 8 months ago

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