Carefully read each problem before answering. Please write clearly, and show and
ID: 1169873 • Letter: C
Question
Carefully read each problem before answering. Please write clearly, and show and label all factors used in any problem requiring mathematical calculations. SHOW ALL WORK. A company is considering buying one of two new bottle capping machines. One of the alternatives (an expected life of 20 years) is from the Caps-R-Us company. The other (an expected life of 10 years) is from the One-Top-Fits-All company. One of the two must be purchased, and neither is expected to have a salvage value at the end of its respective life. Present Worth Analysis will be utilized in making the decision. Fortunately, the alternative from the Caps-R-Us company has already been calculated for you. It was found that Present Worth of the Costs was $575.000 (based on its 20 year life). For the One Top Fits All alternative, the following characteristics are known: The initial cost of the machine is $320,000 and has a ten year life. Yearly operating and maintenance costs are expected to be $7,000 per year for the first seven (7) years and $10,000 per year for the last three (3) years. The machine requires a major overhaul costing $55,000 at the end of the fifth year of service. Based on Present Worth Analysis, decide between these alternatives. Assume that the benefits for each alternative are identical. MARR = 7%. (35.5)Explanation / Answer
Present worth of One T. F is calculated below:
Year
Cash flows (C)
Discount factor (D) {1/(1 + 0.07)^year}
Present worth
(C ×D)
0
-$320,000
1
-$320,000
1
-$7,000
0.9346
-$6,542.20
2
-$7,000
0.8734
-$6,113.80
3
-$7,000
0.8163
-$5,714.10
4
-$7,000
0.7629
-$5,340.30
5
-$62,000
0.7130
-$44,206.00
6
-$7,000
0.6663
-$4,664.10
7
-$7,000
0.6227
-$4,358.90
8
-$10,000
0.5820
-$5,820.00
9
-$10,000
0.5439
-$5,439.00
10
-$10,000
0.5083
-$5,083.00
-$413,281.40
Present worth of the project is $413,281.40. This is smaller than the first project $575,000. It means One T. F is less expensive. Therefore, One T. F should be selected.
Year
Cash flows (C)
Discount factor (D) {1/(1 + 0.07)^year}
Present worth
(C ×D)
0
-$320,000
1
-$320,000
1
-$7,000
0.9346
-$6,542.20
2
-$7,000
0.8734
-$6,113.80
3
-$7,000
0.8163
-$5,714.10
4
-$7,000
0.7629
-$5,340.30
5
-$62,000
0.7130
-$44,206.00
6
-$7,000
0.6663
-$4,664.10
7
-$7,000
0.6227
-$4,358.90
8
-$10,000
0.5820
-$5,820.00
9
-$10,000
0.5439
-$5,439.00
10
-$10,000
0.5083
-$5,083.00
-$413,281.40