Question

2. The manager in a canned food processing plant is trying to decide between two labeling machines.

	Machine A	Machine B
First Cost	$15,000	$25,000
Maintenance and operating costs	1,600	400
Annual benefit	8,000	13,000
Salvage value	3,000	6,000
Useful life, in years	6	10

a) Assume an interest rate of 6%. slove using annual worth to determine which machine should be chosen.

b) Solve using Internal Rate of Return

Answer 1

a) Determination of Annual worth

Machine A

Annual worth = -15000(A/P,6,6) - 1600 + 8000 +3000(A/F,6,6)

Using DCIF tables

Annual worth = -15000(0.2034) - 1600 + 8000 +3000(0.1434)

Annual worth = $9881.2

Machine B

Annual worth = -25000(A/P,6,10) - 400 + 13000 +6000(A/F,6,10)

Using DCIF tables

Annual worth = -25000(0.1359) - 400 + 13000 +6000(0.0759)

Annual worth = $9657.9

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b) In order to estimate IRR, Annual worth of benefits = Annual worth of cost

Machine A

Annual worth of benefits = Annual worth of cost

15000(A/P,i,6) + 1600 = 8000 +3000(A/F,i,6)

Solving by trial and error method

i = 37.45% = 38%

Machine B

Annual worth of benefits = Annual worth of cost

25000(A/P,i,10) + 400 = 13000 +6000(A/F,i,10)

Solving by trial and error method

i = 48.89% = 49%