The Briggs and Stratton Commercial Division designs and manufacturers small engines for golf turf maintenance equipment. A robotics-based testing system with support equipment will ensure that their new signature guarantee program entitled "Always Insta-Start" does indeed work for every engine produced.
| Pull System | Push System | |
| First cost of equipment | $-1,950,000 | $-3,050,000 |
| AOC per Year | $-620,000 | $-500,000 |
| Salvage Value | $85,000 | $130,000 |
| Estimated Life | 8 years | 8 years |
Determine the salvage value for the push system that will make the company indifferent to the two systems. Also, MARR = 11% per year. The salvage value for the push system is determined to be $ in $1000 units.
| Present value of Pull system: | ||||
| AOC | -620000 | |||
| Annuity for 8 years at 11% | 5.1461 | |||
| Present value of AOC | -3190582 | |||
| Add: initial investment | -1950000 | |||
| Present value of outflows | -5140582 | |||
| Less: Present value of salvage | 36881.5 | |||
| ($ 85000* 0.4339) | ||||
| Present worth | -5103701 | |||
| Push System | ||||
| AOC | -500000 | |||
| Annuity for 8 years at 11% | 5.1461 | |||
| Present value of AOC | -2573050 | |||
| Add: initial investment | -3050000 | |||
| Present value of outflows | -5623050 | |||
| To be equivalent, Net present worth | -5103701 | |||
| Present value of Salvage | 519349 | |||
| Divide: Present valeu factor | 0.4339 | |||
| Salvage value of Push System | 1196932 | |||
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