Question

Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $5,000 using the gang punch, but annual raw material costs would decrease $9,000. MARR is 5.0 %/year.

What is the present worth of this investment?

Answer 1

Solution:-

Given,

The Punch gang has an initial cost of $100,000. Annual labor costs increase by $5,000 while annual raw material costs decrease by $9,000.

Calculate the net benefit as follows:

Net benefit = Decrease in material cost – Increase in labor cost

                     = $9,000 - $5,000

                     = $ 4,000

Thus, the net benefit is $4,000.

The present worth of this investment is calculated as:

PW = -$100,000 + $4,000*(P/A,5%,15)

       = -100,000 + 4,000*10.380

       = -100,000 + 41,520

Hence,

      Present worth of this investment is -58,480