Question
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Refer to example 6-3. Re-evaluate the recommended alternative if (a) the MARR= 15% per year; (b)...
Refer to example 6-3. Re-evaluate the recommended alternative if (a) the MARR= 15% per year; (b) the selling price is $0.50 per good unit; and (c) rejected units can be sold as scrap for $0.10 per unit. Evaluate each change individually. (d) What is the recommended alternative if all three of these changes occur simultaneously.
EXAMPLE6-3
| MARR= | 10% | Annual Output Capacity |
120,000 | |
| Useful Life= | Selling Price= | $0.38 | ||
| Expenses | P1 | P2 | P3 | P4 |
| Capital Investment= |
$24,000 | $30,400 | $49,600 | $52,000 |
| Power= | $2,720 | $2,720 | $4,800 | $5,040 |
| Labor= | $26,400 | $24,000 | $16,800 | $14,800 |
| Maintenance= | $1,600 | $1,800 | $2,600 | $2,000 |
| Tax and Insurance= |
$480 | $608 | $992 | $1,040 |
| EOY | P1 | P2 | P3 | P4 |
| 0 | $24,000 | $30,400 | $49,600 | $52,000 |
| 1 | $31,200 | $29,128 | $25,192 | $22,880 |
| 2 | $31,200 | $29,128 | $25,192 | $22,880 |
| 3 | $31,200 | $29,128 | $25,192 | $22,880 |
| 4 | $31,200 | $29,128 | $25,192 | $22,880 |
| 5 | $31,200 | $29,128 | $25,192 | $22,880 |
| PW= | $142,273 | $140,818 | $145,098 | $138,733 |
| AW= | $37,531 | $37,147 | $38,276 | $36,597 |
| FW= | $229,131 | $226,789 | $233,681 | $223,431 |
Solutions
Expert Solution
Current Ranking of the projects are as below based on data provided in the question :
| EOY | P1 | P2 | P3 | P4 |
| PW= | $142,273 | $140,818 | $145,098 | $138,733 |
| AW= | $37,531 | $37,147 | $38,276 | $36,597 |
| FW= | $229,131 | $226,789 | $233,681 | $223,431 |
| PW= Rank | 3 | 2 | 4 | 1 |
| AW= Rank | 3 | 2 | 4 | 1 |
| FW= Rank | 3 | 2 | 4 | 1 |
Since the outgo is least in P4 , as per current position P4 should be selected.
Now (a) If the MRR is changed to 15% :
| EOY | P1 | P2 | P3 | P4 |
| PW= | 128,587 | 128,042 | 134,047 | 128,697 |
| AW= | 38,360 | 38,197 | 39,988 | 38,392 |
| FW= | 258,635 | 257,537 | 269,617 | 258,856 |
| PW= Rank | 2 | 1 | 4 | 3 |
| AW= Rank | 2 | 1 | 4 | 3 |
| FW= Rank | 2 | 1 | 4 | 3 |
After change in MRR to 15% Project 2 becomes preferable.
Workings :
(1) PW ; MARR@15% , Discounting Factor = 1,0.87,0.76,0.66,0.57,0.50 , DF is to be multiplied with annual cash out go then we get PW of 24000,27130,23592,20515,17839,15512 respectively for P1 and thus total PW =128,587. Similarly computed for other altenatives.
(2) AW : MARR@15% ;
e.g. for P1 , AW of initial investment of $1 0.298 so AW for P1 for initial investment $24,000=7160
Total AW = 7160+31200=38,360 (31200 is equal per annum outflows)
(3) FW = future value of all outflows i.e. compounding the amounts @15% MARR.
(b) , (c) Since further information as to sale or production of the units have not been given , there will not be any change on evluation if SP is changed or whther rejected units can be sold at any price. Assuming these parameters same for all 4 alternatives P4 is the answer if these changes occur.
(d) P2 is the answer .
ekkarill92 answered 1 year agoRelated Solutions
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