Question

The Briggs and Stratton Commercial Division designs and manufacturers small engines for golf turf maintenance equipment. A robotics-based testing system with support equipment will ensure that their new signature guarantee program entitled "Always Insta-Start" does indeed work for every engine produced.

	Pull System	Push System
First cost of equipment	$-1,700,000	$-2,150,000
AOC per Year	$-740,000	$-500,000
Salvage Value	$125,000	$100,000
Estimated Life	8 years	8 years

Determine the salvage value for the push system that will make the company indifferent to the two systems. Also, MARR = 12% per year.

The salvage value for the push system is determined to be $  in $1000 units.

Answer 1

PW of Pull System ($) = -1,700,000 - 740,000 x P/A(12%, 8) + 125,000 x P/F(12%, 8)

= -1,700000 - 740,000 x 4.9676** + 125,000 x 0.4039**

= -1,700,000 - 3,676,024 + 50,487.5

= -5,325,536.5

If required salvage value of Push System be S, then by equivalence,

PW of Pull System = PW of Push System

-5,325,536.5 = -2,150,000 - 500,000 x P/A(12%, 8) + S x P/F(12%, 8)

-5,325,536.5 = -2,150,000 - 500,000 x 4.9676** + S x 0.4039**

-5,325,536.5 = -2,150,000 - 2,483,800 + S x 0.4039

-5,325,536.5 = -4,633,800 + S x 0.4039

S x 0.4039 = -691,736.5

S = -1,712,643

S ($'000) = -1,712.64

**From P/A and P/F factor tables