PROBLEM The following costs are associated with three tomato-peeling machines being considered for use in a...

PROBLEM The following costs are associated with three tomato-peeling machines being considered for use in a food canning plan. Machine A Machine B Machine C First cost $52,000 $67,000 $63,000 Annual Maintenance & Operating costs Annual increase starting in year 2 15,000 12,000 9,000 250 Annual benefit 38,000 37,000 31,000 Salvage value 13,000 22,000 19,000 Useful life, in years 4 12 6 If the canning company uses a MARR of 12%, which is the best alternative? Show your analysis using each of the following methods:

(a) Present worth

(b) Annual equivalence

(c) Rate of return

Please perform in excel and show the procedure.

Expert Solution


		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate =MARR=`12%=0.12
		N=Year of Cash Flow

		CASH FLOW ANALYSIS OF MACHINE A
	N	Year	0	1	2	3	4
	A	Total initial cash flow	-$52,000
	b	Annual Benefits		$38,000	$38,000	$38,000	$38,000
	c	Annual Maintenance and Operating Costs		-$15,000	-$15,250	-$15,500	-$15,750
	D=b+c	Net annual Cash Flow		$23,000	$22,750	$22,500	$22,250
	E	Terminal Salvage value					$13,000
	CF=A+D+E	Net Cash Flow	($52,000)	$23,000	$22,750	$22,500	$35,250	SUM
	PV=CF/(1.12^N)	Present Value of Net Cash Flow	($52,000)	$20,536	$18,136	$16,015	$22,402	$25,089
(a)	NPV=Sum of PV	Present Worth	$25,089
(b)	PMT	Annual Equivalent Worth	$8,260	(Using PMT function of excel with Rate=12%, Nper=4, Pv=-25089)
.(c)	IRR	Internal Rate of Return	31.86%	(Using IRR function over Net Cash Flow)

		CASH FLOW ANALYSIS OF MACHINE B
	N	Year	0	1	2	3	4	5	6	7	8	9	10	11	12
	A	Total initial cash flow	-$67,000
	b	Annual Benefits		$37,000	$37,000	$37,000	$37,000	$37,000	$37,000	$37,000	$37,000	$37,000	$37,000	$37,000	$37,000
	c	Annual Maintenance and Operating Costs		-$12,000	-$12,250	-$12,500	-$12,750	-$13,000	-$13,250	-$13,500	-$13,750	-$14,000	-$14,250	-$14,500	-$14,750
	D=b+c	Net annual Cash Flow		$25,000	$24,750	$24,500	$24,250	$24,000	$23,750	$23,500	$23,250	$23,000	$22,750	$22,500	$22,250
	E	Terminal Salvage value													$22,000
	CF=A+D+E	Net Cash Flow	($67,000)	$25,000	$24,750	$24,500	$24,250	$24,000	$23,750	$23,500	$23,250	$23,000	$22,750	$22,500	$44,250	SUM
	PV=CF/(1.12^N)	Present Value of Net Cash Flow	($67,000)	$22,321	$19,731	$17,439	$15,411	$13,618	$12,032	$10,630	$9,390	$8,294	$7,325	$6,468	$11,358	$87,018
(a)	NPV=Sum of PV	Present Worth	$87,018
(b)	PMT	Annual Equivalent Worth	$14,048	(Using PMT function of excel with Rate=12%, Nper=12, Pv=-87018)
.(c)	IRR	Internal Rate of Return	35.76%	(Using IRR function over Net Cash Flow)

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