Question

TT Racing and Performance Motor Corporation wishes to evaluate two alternative CNC machines for NHRA engine building. the AW at 10% per year to the two machines are close to:

	machine 1	machine 2
first cost	250000	370500
annual cost	40000	50000
salvage   value	20000	30000
life , years	3	6

	A.	machine 1= -124485.3 machine 2= -121182.205
	B.	machine 2= -134485.3 machine 1= -131182.205
	C.	machine 1= -134485.3 machine 2= -131182.205
	D.	machine 1= 134485.3 machine 2= 131182.205

Answer 1

	machine 1	machine 2
first cost	250,000	370,500
annual cost	40,000	50,000
salvage   value	20,000	30,000
life, years	3	6

From the given information, it can be noticed that the life of both the machines is not equal. The Machine 1 has a life of 3 years and the life of Machine 2 is 6 years. In case of unequal lives, we have to use the common multiple method and convert the unequal life into equal life and then can evaluate. The LCM of 3 years and 6 years is 6 years. Therefore, the Machine 1 is to be repeated 2 times.

Interest = 10%

Calculating AW of Machine 1

Step 1 – Calculate Present Worth

PW = -250,000 – 250,000 (P/F, 10%, 3)– 40,000 (P/A, 10%, 6) + 20,000 (P/F, 10%, 3) + 20,000 (P/F, 10%, 6)

PW = -250,000 – 250,000 (0.75131)– 40,000 (4.35526) + 20,000 (0.75131) + 20,000 (0.56447) = -585,722.3

Step 2 – Calculate AW

AW = PW (A/P, 10%, 6)

AW = -585,722.3 (A/P, 10%, 6)

AW = -585,722.3 (0.22961) = -134,487.7

Calculating AW of Machine 1

AW = -370,500 (A/P, 10%, 6) – 50,000 + 30,000 (A/F, 10%, 6)

AW = -370,500 (0.22961) – 50,000 + 30,000 (0.12961)

AW = -131,182.2

Close Answer

C.      

machine 1= -134,485.3

machine 2= -131,182.205