Question

0. Laser bedris ale to be major project to e le exact 1 of 4 alignment of components. Two types of laser alignment systems, with the costs shown below, are suitable for the project. First Cost Salvage Annual operating cost Additional taxes and insurance IC System $5,000 $1,000 $600/yr $180/yr UC System $3,200 $0 $950/yr $0/yr If both systems have a life of 4 years and the minimum rate of return is 15%, which offers the lowest equivalent annual cost?

Answer 1

Net Present Value of IC System Particulars Years 2 0 1 3 4 (5,000) Cash Outflows: Initial cost Annual Operating costs Additional taxes & Insurance (600) (180) (600) (180) (600) (180) (600) (180) Cash Inflows Salvage Value 1,000 Net Cash flows A PV factor @ 15% B= Present Value (AxB) = (5,000) 1.000 (5,000) (780) 0.86957 (678) (780) 0.75614 (590) (780) 0.65752 (513) 220 0.57175 126 Net Present Value of IC system (6,655) Equivalent Annual Cost = = NPV x rate/(1-(1+rate)^-time) (6,655) * 0.15/(1-(1.15)^-4) (6,655) x 0.15 / 0.42825 (2,331)

Net Present Value of UC System Particulars Years 2 0 1 3 3 4 Cash Outflows: Initial cost Annual Operating costs (3,200) (950) (600) (600) (600) Net Cash flows A= PV factor @ 15% B= Present Value (AxB) = (3,200) 1.000 (3,200) (950) 0.86957 (826) (600) 0.75614 (454) (600) 0.65752 (395) (600) 0.57175 (343) Net Present Value of UC system (5,217) Equivalent Annual Cost NPV x rate/(1-(1+rate)-time) (5,217) x 0.15/(1-(1.15)^-4) (5,217) x 0.15 / 0.42825 (1,827) Equivalent Costs : IC System UC System 2,331 1,827 Therefore, UC System offers a lower Equivalent Annual Cost

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