A firm is considering the purchase of one of two new machines. The data on each are given below.
Machine A Machine B
Initial cost $40,000 $60,000
Service life 8 years 10 years
Salvage value $2,000 $5,000
Net operating cost $5,000/year $3,000/year
a) If the firm's MARR is 12%, which alternative should be selected when using equivalent annual cost comparison?
b) If the firm only needs the machine for 5 years. Assuming salvage value will be $8,000 for machine A, $15,000 for machine B at the end of the 5th year, which alternative should be selected when using the present equivalent cost comparison?
A firm is considering the purchase of one of two new machines. The data on each are given below.
Machine A Machine B
Initial cost $40,000 $60,000
Service life 8 years 10 years
Salvage value $2,000 $5,000
Net operating cost $5,000/year $3,000/year
a) If the firm's MARR is 12%, which alternative should be selected when using equivalent annual cost comparison?
b) If the firm only needs the machine for 5 years. Assuming salvage value will be $8,000 for machine A, $15,000 for machine B at the end of the 5th year, which alternative should be selected when using the present equivalent cost comparison?
Related textbook solutions
Related questions
Consider the following EOY cash flows for two mutually exclusive alternatives (one must be chosen):
|
Machine X |
Machine Y |
|
|
Capital investment |
$6,000 |
$14,000 |
|
Annual expenses |
$2,500 |
$2,400 |
|
Useful life |
12 years |
18 years |
|
Market value at end of useful life |
0 |
$2,800 |
The MARR is 5% per year
a) Determine which alternative should be selected if the repeatability assumption applies.
b) Determine which alternative should be selected if the analysis period is 18 years, the repeatability assumption does not apply, and a machine can be leased for $8,000 per year after the useful life of either machine is over.
Volusia County has two alternatives for a traffic light in an excluded area. Alternative A is to install an electrically powered traffic light, while alternative B is to install a solar-powered traffic light. The initial cost, the annual operating cost is provided in the following table. With MARR 10% and over a period of 5 years, which alternative should be selected?
|
Estimate |
Electrical Powered |
Solar-powered |
|
Initial Cost |
$2,500 |
$6,000 |
|
Annual Operating Cost |
$900 |
$50 |
|
Number of Periods |
5 |
5 |
Alternative A has a first cost of $20,000, an operating cost of $9,000 per year, and a $5,000 salvage value after 5 years. Alternative B will cost $35,000 with an operating cost of $4,000 per year and a salvage value of $7,000 after 5 years. At a MARR of 12% per year, which should be selected?
What is the capitalized equivalent cost of a dam that will cost $25 million now and will require $2 million in maintenance annually? The effective annual rate is 12%.
How many dollars would be required today to purchase an item that increased in cost by exactly the inflation rate if the cost 30 years ago was $1000 and inflation was 4% per year?
A certain machine will have a cost of $25,000 (then $) six years from now. Find the PW of the machine if the real interest rate is 10% per year and the inflation rate is 5% per year using (a) constant-value dollars, and (b) then-current dollars.
