8 35 points To meet an increase in demand an existing packag

8) (35 points) To meet an increase in demand, an existing packaging machine must be either upgraded or replaced with a new machine. The existing packaging machine has a remaining life of 5 years and is expected to have a salvage value of $5,000 at the end of its useful life. Operating and maintenance costs have been $17,500 per year. Currently the machine has a market value of $25,000. A new machine costs $75,000, has an annual O&M; cost of $20,000, and a salvage value of $12,500 at the end of 5 years. Alternative 1. A new machine is purchased and the existing machine is sold at its market value. Alternative 2. The existing machine is upgraded and the upgrades are expected to cost $37,500 and the upgraded machine\'s salvage value and annual O&M; costs are expected to remain the same as that of the existing machine. Using an annual cost comparison, determine the preferred course of action for a MARR of 10% per year compounded annually.

Solution

ALTERNATIVE 1: Annual worth of net first cost = (75000-25000)*0.10*1.10^5/(1.10^5-1) = $        13,189.87 Annual maintenance cost $        20,000.00 AW of salvage value = 12500*0.10/(1.10^5-1) = $        -2,047.47 Equivalent annual cost $        31,142.41 ALTERNATIVE 2: Annual worth of net first cost = 37500*0.10*1.10^5/(1.10^5-1) = $          9,892.41 Annual maintenance cost $        17,500.00 AW of salvage value = 5000*0.10/(1.10^5-1) = $            -818.99 Equivalent annual cost $        26,573.42 PREFERRED COURS OF ACTION IS ALTERNATIVE 2 WITH LOWER ANNUAL EQUIVALENT COST.