Question

One of two methods must be used to produce expansion anchors. Method A costs $75,000 initially...

One of two methods must be used to produce expansion anchors. Method A costs $75,000 initially and will have a $7,000 salvage value after 3 years. The operating cost with this method will be $36,000 per year. Method B will have a first cost of $105,000, an operating cost of $7,000 per year, and a $46,000 salvage value after its 3-year life. The interest rate for both the methods is 14%. Which method should be used on the basis of a present worth analysis?

The present worth of method A is $  and that of method B is $  .

Method B is selected by the company.

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Answer #1
Method A:
Annual cash operating cost -36000
Annuity for 3 years at 14% 2.3216
Present value of outflows -83577.6
Add: Initial investment -75000
Total Ooutflows -158578
Less: Slaveg value 4725
($7000 *PVF i.e. 0.675)
Net present worth -153853
Methd B
Annual cash operating cost -7000
Annuity for 3 years at 14% 2.3216
Present value of outflows -16251.2
Add: Initial investment -105000
Total Ooutflows -121251
Less: Slaveg value 31050
($46000 *PVF i.e. 0.675)
Net present worth -90201
Method B shall be selected.
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