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In: Accounting
A company is looking into two types of compressors to replace an aging compressor. The data...
A company is looking into two types of compressors to replace an aging compressor. The data in the table below has been compiled for comparison
| Centrifugal Compressor | Reciprocating Compressor | |
| Installed Cost | $2,000,000 | $850,000 |
| Annual O&M costs | $50,000 | $150,000 |
| Service Life in years | 15 | 8 |
| Salvage Value | $80,000 | $60,000 |
If the firm's MARR is known to be 16%, which option will you recommend?
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| Particulars | Centrifugal | Reciprocating | Note |
| Cost of Project | 2,000,000.00 | 850,000.00 | A |
| Annual O&M costs | 50,000.00 | 150,000.00 | B |
| Salvage Value | 80,000.00 | 60,000.00 | C |
| Life | 15.00 | 8.00 | D |
| Annuity factor at 16% | 5.5755 | 4.3436 | E |
| Present Value of Annual O&M costs | 278,772.81 | 651,538.63 | F=B*E |
| Present Value at 16% | 0.1079 | 0.3050 | G |
| Present Value of Salvage Value | 8,634.16 | 18,301.53 | H=C*G |
| Net Present Value | 2,270,138.65 | 1,483,237.11 | I=A+F-H |
| Net cost of Reciprocating Compressor is less so it should be accepted. | |||
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