Refer to example 6-3. Re-evaluate the recommended alternative if (a) the MARR= 1
ID: 2526941 • Letter: R
Question
Refer to example 6-3. Re-evaluate the recommended alternative if (a) the MARR= 15% per year; (b) the selling price is $0.50 per good unit; and (c) rejected units can be sold as scrap for $0.10 per unit. Evaluate each change individually. (d) What is the recommended alternative if all three of these changes occur simultaneously.
EXAMPLE6-3
MARR= 10% Annual OutputCapacity 120,000 Useful Life= Selling Price= $0.38 Expenses P1 P2 P3 P4 Capital
Investment= $24,000 $30,400 $49,600 $52,000 Power= $2,720 $2,720 $4,800 $5,040 Labor= $26,400 $24,000 $16,800 $14,800 Maintenance= $1,600 $1,800 $2,600 $2,000 Tax and
Insurance= $480 $608 $992 $1,040 EOY P1 P2 P3 P4 0 $24,000 $30,400 $49,600 $52,000 1 $31,200 $29,128 $25,192 $22,880 2 $31,200 $29,128 $25,192 $22,880 3 $31,200 $29,128 $25,192 $22,880 4 $31,200 $29,128 $25,192 $22,880 5 $31,200 $29,128 $25,192 $22,880 PW= $142,273 $140,818 $145,098 $138,733 AW= $37,531 $37,147 $38,276 $36,597 FW= $229,131 $226,789 $233,681 $223,431
Explanation / Answer
Current Ranking of the projects are as below based on data provided in the question :
Since the outgo is least in P4 , as per current position P4 should be selected.
Now (a) If the MRR is changed to 15% :
After change in MRR to 15% Project 2 becomes preferable.
Workings :
(1) PW ; MARR@15% , Discounting Factor = 1,0.87,0.76,0.66,0.57,0.50 , DF is to be multiplied with annual cash out go then we get PW of 24000,27130,23592,20515,17839,15512 respectively for P1 and thus total PW =128,587. Similarly computed for other altenatives.
(2) AW : MARR@15% ;
e.g. for P1 , AW of initial investment of $1 0.298 so AW for P1 for initial investment $24,000=7160
Total AW = 7160+31200=38,360 (31200 is equal per annum outflows)
(3) FW = future value of all outflows i.e. compounding the amounts @15% MARR.
(b) , (c) Since further information as to sale or production of the units have not been given , there will not be any change on evluation if SP is changed or whther rejected units can be sold at any price. Assuming these parameters same for all 4 alternatives P4 is the answer if these changes occur.
(d) P2 is the answer .
EOY P1 P2 P3 P4