Question

A manufacturer needs a new plastic injection mold machine for a new type of part they never made before. They can pick a versatile machine that would enable them to make a variety of parts or they can pick a basic machine that can make the parts they need now. Regardless, they must choose the machine that gives them the highest equivalent uniform annual worth (EUAW). The versatile machine costs $240,000 and will increase the annual profit by $90,000. It will have a life of 5 years and will not be replaced. A basic machine costs $140,000 but will only increase annual profit by $35,000 and lasts 10 years. The analysis period is 10 years and interest rate is 9%. State below the EUAW of each machine. Also state below which machine should be purchased and why. Give answers to closest dollar.

Answer 1

Versatile Machine

Initial cost = $240,000

Annual increase in profit = $90,000

Life = 5 years

Calculate Equivalent uniform annual worth -

EUAW = -$240,000(A/P, 9%, 5) + $90,000

EUAW = (-$240,000 * 0.25709) + $90,000

EUAW = -$61,701.6 + $90,000

EUAW = $28,298.4 or $28,298

The EUAW of Versatile machine is $28,298.

Basic Machine

Initial cost = $140,000

Annual increase in profit = $35,000

Life = 10 years

Calculate Equivalent Uniform Annual Worth -

EUAW = -$140,000(A/P, 9%, 10) + $35,000

EUAW = (-$140,000 * 0.15582) + $35,000

EUAW = -$21,814.8 + $35,000

EUAW = $13,185.2 or $13,185

The EUAW of Basic machine is $13,185.

The EUAW of Versatile machine is highest.

So, Versatile machine should be purchased.