Question

Kiwidale Dairy is considering purchasing a new ice-cream maker. Two models, Smoothie and Creamy, are available and their information is given below (all costs and profits are in dollars):

	Smoothie	Creamy
First Cost	16,000	35,500
Service Life	14 Years	12 Years
Annual Profit	4,200	10,950
Annual Operating Cost	1,200	3,450
Salvage Value	2,400	4,850

Which alternative is better if the MARR for Kiwidale Dairy is 17.5%. Assume that each alternative can be repeated indefinitely {Perform all calculations using 5 significant figures and round any monetary answers to the nearest cent}.

What is the Annual Worth of the Smoothie Model?

What is the Annual Worth of the Creamy Model?

Which model would you choose?

Answer 1

Annual Worth of the Smoothie Model = -16,000(A/P, 17.5%, 14) - 1,200 + 4,200 + 2,400(A/F, 17.5%, 14)

                                                           = -16,000(0.19544) - 1,200 + 4,200 + 2,400(0.02044)

                                                           = - 3,127.04 - 1,200 + 4,200 + 49.06

                                                           = -$77.98

Annual Worth of the Creamy Model = -35,500(A/P, 17.5%, 12) - 3,450 + 10,950 + 4,850(A/F, 17.5%, 12)

                                                           = -35,500(0.20453) - 3,450 + 10,950 + 4,850(0.02953)

                                                           = - 7,260.82 - 3,450 + 10,950 + 143.22

                                                           = $382.40

Since AW of Creamy Model is more than Smoothie Model, therefore, you should choose the Creamy Model.