Question

A large manufacturing company is now evaluating three mutually exclusive production systems. The following table describes the data:

System	A	B	C
Initial investment (millions)	$2,005	$8,800	$19,000
Annual receipts less expenses (millions)	$  600	$1,500	$ 2,300
Salvage value (millions)	$15	$100	$330
Useful life (years)	5	10	20

Apply repeatability assumption and use the AW method to select the best system. The MARR is 10% per year, and the system chosen must provide service for 20 years. (correct your final answer to 3 decimal places)

Answer 1

MARR = 10% per year

For Type - A:

Useful life = 5 years

From the compound interest table, we obtain

(A/P, 10%, 5) = 0.2638

(A/F, 10%, 5) = 0.1638

Intial investment = -$2,005 million

Annual net receipts = $600 million

Salvage Value = $15 million

Annual worth of the Type - A system = AW of the initial investment + Annual net receipts + AW of the salvage value

= -$2,005 million (A/P, 10%, 5) + $600 million + $15 million (A/F, 10%, 5)

= -$2,005 million * 0.2638 + $600 million + $15 million * 0.1638

= $73.538 million

For Type - B:

Useful life = 10 years

From the compound interest table, we obtain

(A/P, 10%, 10) = 0.1627

(A/F, 10%, 10) = 0.0627

Intial investment = -$8,8000 million

Annual net receipts = $1,500 million

Salvage Value = $100 million

Annual worth of the Type - B system = AW of the initial investment + Annual net receipts + AW of the salvage value

= -$8,800 million (A/P, 10%, 10) + $1,500 million + $100 million (A/F, 10%, 10)

= -$8,800 million * 0.1627 + $1,500 million + $100 million * 0.0627

= $74.510 million

For Type - C:

Useful life = 20 years

From the compound interest table, we obtain

(A/P, 10%, 20) = 0.1175

(A/F, 10%, 20) = 0.0175

Intial investment = -$19,0000 million

Annual net receipts = $2,300 million

Salvage Value = $330 million

Annual worth of the Type - C system = AW of the initial investment + Annual net receipts + AW of the salvage value

= -$19,000 million (A/P, 10%, 20) + $2,300 million + $330 million (A/F, 10%, 20)

= -$19,000 * 0.1175 + $2,300 million + $330 million * 0.0175

= $73.275 million

As the AW of type - B production system is the highest among the given alternatives, select type- B production system.