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

Repeat the cash flows for alternative A using the LCM of years = 6. A is sold at a price of 5000 in third year and is repurchased at a cost of 70000 so that the cash flow is generated for six years. Find the increment by subtracting cash flows of A from B. This gives the incremental cash flow using their LCM

	Alternative A			Alternative B
End of year	Initial cost and salvage value	Annual cash flow	Final cash flow	Initial cost and salvage value	Annual cash flow	Final cash flow		Increment B - A
0	-70000		-70000	-95000		-95000		-25000
1		-9000	-9000		-7000	-7000		2000
2		-9000	-9000		-7000	-7000		2000
3	-65000	-9000	-74000		-7000	-7000		67000
4		-9000	-9000		-7000	-7000		2000
5		-9000	-9000		-7000	-7000		2000
6	5000	-9000	-4000	10000	-7000	3000		7000