Question

A major industrial firm desires an economic analysis to determine which of two different machines should be purchased. Each machine is capable of performing the same task in a given amount of time. Assume the minimum attractive rate of return (MARR) is 8%. The following data are to be used in your analysis:

	Machine X	Machine Y
First Cost	$5,000	$8,000
Annual Maintenance Cost	$0	$150
Salvage Value	$0	$2,000
Estimated Life (years)	5	12

Which machine would you choose? Prepare Cash Flow Diagrams. Base your answer on annual cost.

Answer 1

Answer:

Given that:

A major industrial firm desires an economic analysis to determine which of two different machines should be purchased .

1) Annual cost of machine x = first cost(a/p,i,n)

Annual cost of machine x = -5,000(a/p,8%,5)

Annual cost of machine x = -5,000 * 0.2505

Annual cost of machine x = -1,252.5

2) Annual cost of machine y = first cost(a/p,i,n) + amc + salvage value(a/f,i,n)

Annual cost of machine y = -8,000(a/p,8%,12) - 150 + 2,000(a/f,8%,12)

Annual cost of machine y = -8,000 0.1327 - 150 + 2,000 0.0527

Annual cost of machine y = -1,061.6 - 150 + 105.4

Annual cost of machine y = -1,106.2

since tha annual cost of machine y is the highest therefore we will select machine y.