Question

In: Economics

a) A company is considering a new piece of equipment that will save them $1818 per...


a) A company is considering a new piece of equipment that will save them $1818 per year. The machine costs $9040. After 8 years in service the machine will have to be replaced. It has no salvage value at the end of eight years. Given a MARR of 10.9% per year. What is the present worth of the machine?

b) Sofia an intern from an engineering school finds an alternative manufacturer who offers the same piece of equipment with a guarantee that it will work for 16 years. It cost $10000 and offers the exact same savings for 16 years. It also has no salvage value. What is the present worth of this machine?

Solutions

Expert Solution

a) The present worth of the machine = - $ 9040 + $ 1818 (1+0.109)1 + $ 1818 (1+0.109)2 + $ 1818 (1+0.109)3 + $ 1818 (1+0.109)4 + $ 1818 (1+0.109)5 + $ 1818 (1+0.109)6 + $ 1818 (1+0.109)7 + $ 1818 (1+0.109)8

Present worth = $ 349.11

The machine will be replaced after 8 years, hence its present worth after replacement =  $ 349.11 x 2

Present worth of machine with replacement = $ 698.22

____________________________________________________________________

b) Present worth from alternative manufacturer =  - $ 10,000 + $ 1818 (1+0.109)1 + $ 1818 (1+0.109)2 + $ 1818 (1+0.109)3 + $ 1818 (1+0.109)4 + $ 1818 (1+0.109)5 + $ 1818 (1+0.109)6 + $ 1818 (1+0.109)7 + $ 1818 (1+0.109)8 + $ 1818 (1+0.109)9 + $ 1818 (1+0.109)10 + $ 1818 (1+0.109)11 + $ 1818 (1+0.109)12 + $ 1818 (1+0.109)13 + $ 1818 (1+0.109)14 + $ 1818 (1+0.109)15 + $ 1818 (1+0.109)16  

Present worth from alternative manufacturer = $ 3492.78

Hence you should select the alternative manufacturer who gaurantees that it will last for 16 years.

Rahul Sunny answered 2 years ago
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