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The machines shown below are under consideration for an improvement to an automated candy bar wrapping...

The machines shown below are under consideration for an improvement to an automated candy bar wrapping process.

Machine C

Machine D

First cost, $

–40,000

–75,000

Annual cost, $/year

–15,000

–10,000

Salvage value, $

12,000

25,000

Life, years

3

6

(Source: Blank and Tarquin)

Question 1 (10 points)

Based on the data provided and using an interest rate of 5% per year, the correct equation to calculate the Capital Recovery “CR” of Machine C is:

  1. CRC = –40,000(P/A, 5%, 3) + 12,000(F/A, 5%, 3)
  2. CRC = –40,000(A/P, 5%, 3) + 12,000(A/F, 5%, 3) –15,000(A/P, 5%,3)
  3. CRC = –40,000(A/P, 5%, 3) + 12,000(A/F, 5%, 3) –15,000
  4. CRC = –40,000(A/P, 5%, 3) + 12,000(A/F, 5%, 3)

Question 2 (10 points)

Based on the data provided and using an interest rate of 5% per year, the Capital Recovery “CR” of Machine C is closest to:

(All the alternatives presented below were calculated using compound interest factor tables including all decimal places)

  1. CRC = –$14,688
  2. CRC = –$18,494
  3. CRC = –$6,117
  4. CRC = –$10,882

Question 3 (10 points)

Based on the data provided and using an interest rate of 5% per year, the correct equation to calculate the Annual Worth “AW” of Machine C is:

  1. AWC= –40,000(P/A, 5%, 3) + 12,000(F/A, 5%, 3) –15,000
  2. AWC = –40,000(A/P, 5%, 3) + 12,000(A/F, 5%, 3) –15,000(A/P, 5%, 3)
  3. AWC = –40,000(A/P, 5%, 3) + 12,000(A/F, 5%, 3) –15,000
  4. AWC = –40,000(A/P, 5%, 3) + 25,000(A/F, 5%, 3) –10,000

Question 4 (10 points)

Based on the data provided and using an interest rate of 5% per year, the Annual Worth “AW” of Machine C is closest to:

(All the alternatives presented below were calculated using compound interest factor tables including all decimal places)

  1. AWC = –$25,882
  2. AWC = –$86,098
  3. AWC = –$21,117
  4. AWC = –$16,390

Solutions

Expert Solution

1.

Capital recovery = First cost (A/P, i, n) + Salvage value (A/F, i, n)

Capital recovery equation for machine C is:

CRC = - 40,000(A/P, 5%, 3) + $ 12,000 (A/F, 5%, 3)

Hence option “d” is correct answer.

2.

CRC = - $ 40,000(A/P, 5%, 3) + $ 12,000 (A/F, 5%, 3)

       = - $ 40,000 x 0.3672 + $ 12,000 x 0.3172

       = - $ 14,688 + $ 3,806.40 = - $ 10,881.60 or -$ 10,882

Hence option “d” is correct answer.

3.

Annual Worth = First cost (A/P, i, n) + Salvage value (A/F, i, n) – Annual cost

Annual Worth equation for machine C is:

AWC = - 40,000(A/P, 5%, 3) + $ 12,000 (A/F, 5%, 3) - $ 15,000

Hence option “c” is correct answer.

4.

AWC = - 40,000(A/P, 5%, 3) + $ 12,000 (A/F, 5%, 3) - $ 15,000

         = - $ 40,000 x 0.3672 + $ 12,000 x 0.3172 - $ 15,000

         = - $ 40,000 x 0.3672 + $ 12,000 x 0.3172 - $ 15,000

         = - $ 14,688 + $ 3,806.40 - $ 15,000

         = - $ 25,881.60 or -$ 25,882

Hence option “a” is correct answer.


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