Question

An industrial engineer is considering two robots for purchase by a fiber optic manufacturing company. Robot X will have a first cost of $125,000, an annual maintenance and operation (M&O) cost of $40,000, and a $60,000 salvage value. Robot Y will have a first cost of $145,000, an annual M&O cost of $33,000, and a $65,000 salvage value. Which should be selected on the basis of an annual worth comparison of 9% per year? Use a 3-year study period.

Interest Rate	9%
Robot X Cash Flows				Robot Y Cash Flows
Year End	Cash Flow	Present Value		Year End	Cash Flow	Present Value
0				0
1				1
2				2
3				3
	Total PV				Total PV
Annual Worth for Robot X				Annual Worth for Robot Y
		-$71,078.56				-$70,454.38
Which model should the company buy?

Answer 1

Robot X
Years		Net cash Outflow	PV Factor9%	Present value
0	Cost of machin	-125000	1.000	-1,25,000.00
1	M&O Cost	-40,000	0.91743	-36,697.25
2	M&O Cost	-40,000	0.84168	-33,667.20
3	M&O Cost	-40,000	0.77218	-30,887.34
3	salvage value	60,000	0.77218	46,331.01
Total PV of cash outflows				-1,79,921
Annual Worth for Robot X(PVAF9%,3Year)				2.531295
Annual vash out flow				-71,078.56
Robot Y
Years		Net cash Outflow	PV Factor9%	Present value
0	Cost of machin	-145000	1.000	-1,45,000.00
1	M&O Cost	-33,000	0.91743	-30,275.23
2	M&O Cost	-33,000	0.84168	-27,775.44
3	M&O Cost	-33,000	0.77218	-25,482.05
3	salvage value	65,000	0.77218	50,191.93
Total PV of cash outflows				-1,78,341
Annual Worth for Robot Y(PVAF9%,3Year)				2.531295
Annual vash out flow				-70,454.38
Which model should the company buy?			Robot Y
Because Annual cash outflow is lower than Robot X