Question

It is economic engineering question.

Please calculate using net present analysis. Don’t use excel. Write clear steps and circle correct answer pleas. Thanks!

Your company needs a new widget injection molder. They are considering two options, as shown in the table below. Initial Cost Annual Benefit Annual O&M Costs Useful Life Option A Option B $8,000 $15,000 $5,500 $7,250 $500 $1,250 2 vears 3 years If the widget molder will be needed for 6 years, and your firm's MARR is 8%, which molder should you recommend to your boss? Your boss has asked you to report the net present worth of your recommendation as well.

Answer 1

I = 8%

Option A

Initial cost = 8000

Annual operating cost = 500

Annual Benefit = 5500

life = 2 years

As widget molder is required for 6 years, option A will be bought for total of 3 times (EOY0, EOY2 & EOY4)

Present worth for 6 years = -8000 + (5500-500) *(P/A, 8%,6) - 8000 *(P/F,8%,2) - 8000 *(P/F, 8%,4)

= -8000 + 5000*(P/A, 8%,6) - 8000 *(P/F,8%,2) - 8000 *(P/F, 8%,4)

= -8000 + 5000*4.622879 - 8000 *0.8573388 - 8000 *0.7350298

= 2375.45

Option B

Initial cost = 15000

Annual operating cost = 1250

Annual benefit = 7250

Life = 3 years

As widget molder is required for 6 years, option B will be bought for total of 2 times (EOY0 & EOY3)

Present worth for 6 years = -15000 + (7250 - 1250)*(P/A, 8%,6) - 15000 *(P/F,8%,3)

= -15000 + 6000*(P/A, 8%,6) - 15000 *(P/F,8%,3)

= -15000 + 6000*4.622879 - 15000 *0.7938322

= 829.79

Option A should be chosen as it has more present value