Question

Dave Metal is examining two options – Machine A and Machine B - for a core-cutting machine. Machine A Initial Cost $ 250,000 Savings $28,000/year Maintenance Cost $10,000/year + $0.05/unit Labor $0.25/widget Life 10 years Salvage Value $22,500. Machine B Initial Cost $ 180,000 Savings $22,000/year Maintenance Cost $20,000 /year Labor $0.50/widget Life 5 years Salvage Value $ 17,000. MARR is 12 percent and the company’s sale projection is 30,000 widgets/year. Should either, both or neither machine be purchased? Use both present worth and annual worth comparisons.

Answer 1

First we compute the npv normally. To compute equivalent annual worth, divide the npv with the present value annuity factor@12% for the respective years of life of the machines.

Machine A

Particulars	Year	PVF@12%	Amount	Present Value
Savings	1-10	5.65022	28000	158206.16
Less : maintenance cost	1-10	5.65022	10000+0.05 x 30000 = 11500	64977.53
Less : labour	1-10	5.65022	30000 x 0.25 = 7500	42376.65
Add: salvage vale	10	0.32197	22500	7244.325
Present value of cash inflows				58096.305
Less : initial cost	0	1	250000	250000
Npv				(-)191903.695

Equivalent annual worth = (-)191903.695 / 5.65022 = (-)33963.93

Machine B

Particulars	Year	PVF@12%	Amount	Present Value
Savings	1-5	3.60478	22000	79305.16
Less : maintenance cost	1-5	3.60478	20000	72095.60
Less : Labour	1-5	3.60478	0.50 x 30000 = 15000	54071.70
Add : Salvage value	5	0.56743	17000	9646.31
Present value of cash inflows				(-)37215.83
Less : initial cost				180000
Npv				(-)217215.83

Equivalent annual worth = (217215.83) / 3.60478 = (-)60257.72

Machine A is better among the two as it's equivalent annual worth is more. However, neither machine is recommended as both have a negative npv and annual worth.