QUESTION 20 A firm is trying to decide which of the two automated packaging equi
ID: 1164597 • Letter: Q
Question
QUESTION 20 A firm is trying to decide which of the two automated packaging equipment to install. For the first option a company can save $58.000 per year in labor but will incur an additional maintenance parts cost after the 3-year warranty period year 4 the mantenance parts wil costsoo and el increase in years to a ? sas company can save $59,500 per year but will incur additional yearly maintenance parts cost of $2500. The two options have a useful life of 8 years and no salvage value. per year. For the second option, the The company uses a MARR interest rate of 9.0% per year, which equipment should the company choose and why? Please show your work and calculations for each option. Partial credit will be providedExplanation / Answer
20.
R = 9%
Useful life = 8 years
For the first option:
Net present value = Present value of the annual savings – present value of the maintenance part costs
Net present value = 58000*(1-1/1.09^8)/.09 - (900/1.09^4 + (900+125)/1.09^5 + (900+ 2*125)/1.09^6 + (900+3*125)/1.09^7 + (900+4*125)/1.09^8 )
Net present value = $317630
For the second option:
Net present value = Present value of the annual savings – present value of the maintenance part costs
Net present value = 59500*(1-1/1.09^8)/.09 - 2500*(1-1/1.09^8)/.09
Net present value = $315484.7
Here, the first option will be selected, because it has the net present value that is $317630 and it is higher than the net present value of second option that is $315484.7.