Question

A large food-processing corporation is considering using new technology to speed up and eliminate waste in the potato-peeling process. The system will save the company $1,800,000 per year in labor and materials. However it will require an additional operating and maintenance (O&M) cost of $627,000. Annual income taxes will also increase by $262,000. The system is expected to have a 8 years service life and will have a salvage value of $338,000. If the company's MARR is 16.8%, what is the maximum amount that should be spent on purchasing the new technology?"

Answer 1

Annual saving in labor and material cost = $1,800,000

Annual additional operating and maintenance cost = $627,000

Annual increase in income tax = $262,000

Salvage value = $338,000

The maximum amount that the company should spent on purchasing the new technology is equal to the present worth of the above stated items.

Calculate present worth -

PW = Annual saving in labor and material cost(P/A, i, n) + Salvage value(P/F, i, n) - Annual additional operating and maintenance cost(P/A, i, n) - Annual increase in income tax(P/A, i, n)

PW = $1,800,000(P/A, 16.8, 8) + $338,000(P/F, 16.8, 8) - $627,000(P/A, 16.8, 8) - $262,000(P/A, 16.8, 8)

PW = [$1,800,000 * 4.23388] + [$338,000 * 0.28870] - [$627,000 * 4.23388] - [$262,000 * 4.23388]

PW = $7,620,984 + $97,580.6 - $2,654,642.76 - $1,109,276.56

PW = $3,954,645.28

The present worth is $3,954,645.28

Thus,

The maximum amount that should be spent on purchasing the new technology is $3,954,645.28