Question

A company with a Can CORN of 15% must install one of two production machines that provide equivalent service (same benefits).

Machine X has an initial cost of $40,000 with an annual operating and maintenance (O&M) cost of $30,000 and a salvage value of $5,000 after its 5-year life.

Machine Y has an initial cost of $60,000 with an annual O&M cost of $20,000 and a salvage value of $12,000 after its 10-year life.

Which choice below gives the correct PW (costs) equation for machine X over the comparative analysis period?

       
PW(cost) = $40k + $40k(P/F,15%,5) + $30k(P/A,15%,10) - $5k(P/F,15%,5) - $5k(P/F,15%,10)

       
PW(cost) = $40k + $30k(P/A,15%,5) - $5k(P/F,15%,5)

       
PW(cost) = $40k + $40k(P/F,15%,5) - $5k(P/F,15%,5) - $5k(P/F,15%,10)

       
PW(cost) = $40k +$40k(P/F,15%,5) + $30k(P/A,15%,10) - $5k(P/F,15%,5)

Answer 1

Initial cost of machine X = $40,000

Annual operating and Maintenance cost = $30,000

salvage value = $5,000

Discount rate = 15%

Annual operating and maintenance cost of $30,000 will be discounted 15% over a period of 5 years to find out profit worth of annual operating and maintenance cost. Salvage value of $5,000 to be received after 5 years will be discounted at 15% to find out profit worth of salvage value and it will reduce the present cost of machine X.

Hence, present cost equation of machine X will be PW(cost) = $40k + $30k(P/A,15%,5) - $5k(P/F,15%,5).

Second option is correct option.

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