Question

An airport needs a modern material handling system for facilitating access to and from a busy maintenance hanger. A second-hand system will cost $75 000. A new system with improved technology can decrease labor hours by 15 % compared to the used system. The new system will cost $140 000 to purchase and install. Both systems have a useful life of five years. The market value of the used system is expected to be $25 000 in five years, and the market value of the new system is anticipated to be $50 000 in five years. Current maintenance activity will require the used system to be operated 8 hours per day for 20 days per month. If labor costs $50 per hour and the MARR is 2 % per month, which system should be recommended?

Answer 1

We can solve this problem incrementally.

The labor saving for the new system :-

Total labor hours =8*20 =160 hours

Labor hour saving =15%*160=24 hours

Total labor saving = $50*24=$1200 per month

The additional investment for the new system = $140,000-$75,000= $65,000

The incremental market value after 5 years=$50,000-$25,000=$25,000

PW of difference at 2% per month=

-$65000+$1200(P/A,2%,60)+$25,000(P/F,2%,60)

(P/A,2%,60)={(1+0.02)⁶⁰-1}/0.02(1+0.02)⁶⁰ = 2.281/0.0656=34.771

(P/F,2%,60)=(1+0.02)^-60 =0.3047

PW of difference at 2% per month=

-$65000+$1200*34.771+$25,000*0.3047 = -$65000 +$41725.2+ $7619.56

=-$15655.24

So new system is not justified and therefore old system needs to be adopted.