Question

A Meat Processing company asked its lead process engineer to evaluate two different types of conveyors for the beef cutting line. Type A has an initial cost of $70,000 and a life of 3 years. Type B has an initial cost of $95,000 and a life expectancy of 6 years. The annual operating cost (AOC) for type A is expected to be $9,000, while AOC for type B is expected to be $7,000. If the salvage values are $5000 and $10,000 for type A and type B respectively, tabulate the incremental cash flow using their LCM (Least Common Multiple) Note:

Answer 1

End of the Year	Type A Alternative	Type B Alternative	Incremental Cash Flow Cash Flows of A – Cash Flows of B
0	$70,000	$95,000	- 15,000
1	$9,000	$7,000	2,000
2	$9,000	$7,000	2,000
3	$70,000+$9,000 -$5000 =74,000	$7,000	67,000
4	$9,000	$7,000	2,000
5	$9,000	$7,000	2,000
6	$9,000-$5000 =4,000	$7,000 - $10,000 =-3,000	7,000

As both the alternatives are cost dominated alternatives, the negative sign in the cash outflows are ignored and the as an inflow the salvage value is deducted.

The LCM of 3 years and 6 years is 6. So the Type A alternative is to be repeated two times, once at 0^th year and again at the end of 3^rd year to make it equal to 6 years.