Please show the full steps!!! Thanks!!! You are doing an analysis on the feasibi
ID: 1090989 • Letter: P
Question
Please show the full steps!!! Thanks!!!
You are doing an analysis on the feasibility of installing an automated drill press in your factory. Unfortunately you are not clairvoyant and can only guess at the annual benefits, salvage value and life time (in years) of the drill press. These values, along with the probabilities of their occurrence are given in the table below. If the drill press costs $10,000 determine the expected benefit to cost ratio of the project using a MARR of 15%. Should the automated drill press be purchased?Explanation / Answer
Benefit to Cost Ratio = Present value of Benefits / Present value of Costs
Present value of Benefits = (Annual Benefit x Annuity P.V. factor) + Present Value of Salvage Value
= ($1,990 x Annuity P.V. factor of 15% for 11.70 years) + ($320 / 1.1511.70)
= ($1,990 x 5.3673) + ($320 / 5.13056)
= $10,680.93 + $62.37
= $10,743.30
Present value of Costs = $10,000 (Given)
Benefit to Cost Ratio = $10,743.30 / $10,000
= 1.0743 or 1.07 (Answer)
Automated drill press should be purchased because it has a benefit to cost ratio of more than 1.
Calculation of Expected Annual Benefit Potential Annual Benefit Probability Probable Annual Benefit $ 1,500 20% $ 300 $ 2,000 50% $ 1,000 $ 2,200 20% $ 440 $ 2,500 10% $ 250 Expected Annual Benefit $ 1,990