Two equipments A and B have initial costs of $100,000 and $120,000 and expected to generate annual savings during the first year of $88,000 and $98,000 respectively.

Two equipments A and B have initial costs of $100,000 and $120,000 and expected to generate annual savings during the first year of $88,000 and $98,000 respectively. The value of these annual savings is expected to increase by 10% per year (over previous period). Assume service life of 2 years, operating hours per year of 4500, Use the NPW method to determining 5 savings/ hour for each equipment. Select the optimal equipment based on your results.

Expert Solution

Answer:
	Particulars	Equipment A	Equipment B
	Initial costs (A)	100,000.00	120,000.00
	PV of Annual savings (B)	160,000.0	178,181.7
	Year 1	80,000.01	89,090.82
		88,000*PVIF(10%,1)	98,000*PVIF(10%,1)
	Year 2	79,999.97	89,090.88
		96,800* PVIF(10%,2)	1,07,800* PVIF(10%,2)

	NPW (B-A)	60,000.0	58,181.7

	Operating hours per year	4,500.00	4,500.00
	Operating hours for 2 years	9,000.00	9,000.00

	Savings or NPW per operating hour	6.67	6.46
		(60,000/9,000)	(58,181.7/9,000)

NOTE:	Since, the discount rate is not given in the question,
	MARR IS ASSUMED AT 10% PER ANNUM.

	Based on the calculations made above, Equipment A should be selected as its savings/hour is
	comparatively higher than equipment B.

	Please please upvote.
	Thanks in advance.

Rahul Sunny answered 2 years ago

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