A large food-processing corporation is considering using laser technology to speed up and eliminate waste in...

A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato peeling process. To implement the system, the company anticipates needing $800,000 to purchase the industrial strength lasers. The system is expected to have an 8-year service life. 180,000 per year will be saved in labor and materials. However, it will require additional costs over eight years. The additional cost is 42,000 in year one. These expenses increase by 2% each year. Assuming a $20,000 salvage value at the end of year eight and a MARR=12% per year, use the NPW method to check whether the project is justifiable.

Expert Solution

Present worth of geometric series = A*[1-(1+g)^n/(1+i)^n]/(i-g)

Present worth of annual cost = 42000*[1-(1+0.02)^8/(1+0.12)^8]/(0.12-0.02)

= 42000*[1-(1.02)^8/(1.12)^8]/(0.1)

= 42000*5.267864

= 221250.29

NPW = -800000 - 221250.29 + 180000*(P/A,12%,8) + 20000*(P/F,12%,8)

= -800000 - 221250.29 + 180000*4.967640 + 20000*0.403883

= -118997.43

Rahul Sunny answered 2 years ago

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