Question

Blue Whale Moving and Storage recently purchased a warehouse building in Santiago. The manager has two good options for moving pallets of stored goods in and around the facility. Alternative 1 includes a 4000-pound capacity, electric forklift (P = $−30,000; n = 12 years; AOC = $−1000 per year; S = $8000), and 500 new pallets at $10 each. The forklift operator’s annual salary and indirect benefits are estimated at $82,000.

Alternative 2 uses two electric pallet movers (“walkies”) each with a 3000-pound capacity (for each mover, P = $−2,000; n = 4 years; AOC = $−150 per year; no salvage) and 800 pallets at $10 each. The two operators’ salaries and benefits will total $105,000 per year. For both options, new pallets are purchased now and every two years that the equipment is in use.

a. If the MARR is 8% per year, use tabulated factors to determine which alternative is better economically.

Answer 1

Ok, let us workout tabular analysis for both the options individually:

For Alternative 1 (all figures except years, in $)

Year	Eqp. Price A	AOC B	Salary and indirect benefit C	Pallets cost D	Salvage Value E	Net cash outlflow A+B+C+D-E	Present value @ 8% MARR
0	30000	0	0	5000	0	35000	35000
1	0	1000	82000	0	0	83000	76852
2	0	1000	82000	5000	0	88000	75446
3	0	1000	82000	0	0	83000	65888
4	0	1000	82000	5000	0	88000	64683
5	0	1000	82000	0	0	83000	56488
6	0	1000	82000	5000	0	88000	55455
7	0	1000	82000	0	0	83000	48430
8	0	1000	82000	5000	0	88000	47544
9	0	1000	82000	0	0	83000	41521
10	0	1000	82000	5000	0	88000	40761
11	0	1000	82000	0	0	83000	35597
12	0	1000	82000	5000	-8000	80000	31769
Total	30000	12000	984000	35000	-8000	1053000	675433

For Alternative 2 (all figures except years, in $)

Year	Eqp. Price A	AOC B	Salary and indirect benefit C	Pallets cost D	Salvage Value E	Net cash outlflow A+B+C+D-E	Present value @ 8% MARR
0	2000	0	0	8000	0	10000	10000
1	0	150	105000	0	0	105150	97361
2	0	150	105000	8000	0	113150	97008
3	0	150	105000	0	0	105150	83471
4	0	150	105000	8000	0	113150	83169
4	2000	0	0	0	0	2000	1470
5	0	150	105000	0	0	105150	71563
6	0	150	105000	8000	0	113150	71304
7	0	150	105000	0	0	105150	61354
8	0	150	105000	8000	0	113150	61131
8	2000	0	0	0	0	2000	1081
9	0	150	105000	0	0	105150	52601
10	0	150	105000	8000	0	113150	52410
11	0	150	105000	0	0	105150	45097
12	0	150	105000	8000	0	113150	44933
Total	6000	1800	1260000	56000	0	1323800	833954

Conclusion: Let us say the company wants to operate for 12 years minimum. For an analysis of 12 years' period, we get to see that if we go by 2nd alternative, we have to replace the machines after every 4 years. It increases the costs.

Further, seeing the present values of the two options, we see the in case of alternative 1 the present value of our net cash outflows across 12 years is $ 675433; whereas that in cast of alternative 2 is $ 833954. Basis this analysis, we get to know that it makes a lot of sense to go by alternative 1 and ignore the other.

I hope it helps you understand better and workout yourself once too.