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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

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 ago

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