Question

ABC Drinks purchases its 355 ml cans in large bulk from Wald-China Can Corporation. The finish on the anodized aluminum surface is produced by mechanical finishing technology called brushing or bead blasting. Engineers at Wald are switching to more efficient, faster, and cheaper machines to supply ABC. Use the estimates and MARR=8% per year to select between two alternatives. Brush alternative: P=$-400,000; n=10 years; S=$50,000; nonlabor AOC=$-60,000 in year 1, decreasing by $5000 annually starting in year 2. Bead blasting alternative: P=$-400,000; n is large, assume permanent; no salvage; nonlabor AOC=$-70,000 per year.

Answer 1

Consider the given problem here the cash flows of the 1^st alternatives are given, => the “present value of the 1^st alternative” is given by.

=> PV(1^st) = (-$400,000) + (-$60,000)/1.08 + (-$55,000)/1.08^2 + (-$50,000)/1.08^3 + (-$45,000)/1.08^4 + (-$40,000)/1.08^5 + (-$35,000)/1.08^6 + (-$30,000)/1.08^7 + (-$25,000)/1.08^8 + (-$20,000)/1.08^9 + (-$15,000)/1.08^10 + $50,000/1.08^10.

=> PV(1^st) = (-$400,000) + (-$55,555.5556) + (-$47,153.6351) + (-$39,691.6120) + (-$33,076.3434) + (-$27,223.3278) + (-$22,055.9369) + (-$17,504.7118) + (-$13,506.7221) + (-$10,004.9793) + (-$6,947.9023) + $23,159.6744.

=> PV(1^st) = (-$400,000) + (-$175,477.1461) + (-$80,290.6986) + $6,206.7928.

=> PV(1^st) = (-$400,000) + (-$175,477.1461) + (-$80,290.6986) + $6,206.7928 = (-$649,561.0519).

=> PV(1^st) = (-$649,561).

Now, the present value of the 2^nd alternative is given by.

=> PV(2^nd) = (-$400,000) + (-$70,000)/0.08 = (-$400,000) + (-$875,000) = (-$1,275,000).

So, the present value of the 1^st alternative is more compare to the 2^nd alternative, => the 1^st one is the more preferable compare to the 2^nd one.