Question

Costs associated with the manufacture of miniature high-sensitivity piezoresistive pressure transducers is, $73,000 per year. A clever industrial engineer found that by spending $16,000 now to reconfigure the production line and reprogram two of the robotic arms, the cost will go down to $58,000 next year and $52,000 in years 2 through 5. Using an interest rate of 10% per year, determine the present worth of the savings due to the reconfiguration. (Hint: Include the reconfiguration cost.)

Answer 1

Cost of reconfiguration = 16000

With reconfiguration, cost will come down from 73000 to 58000 in Year 1 and to 52000 in Year 2 through 5.

Cost saving in Year 1 = 73000 - 58000 = 15000

Cost saving in Year 2 = 73000 - 52000 = 21000

Cost saving in Year 3 = 21000

Cost saving in Year 4 = 21000

Cost saving in Year 5 = 21000

Interest rate = 10%

Calculate the present worth of the savings due to the reconfiguration -

PW = -16000 + 15000(P/F, 10%, 1) + 21000(P/F, 10%, 2) + 21000(P/F, 10%, 3) + 21000(P/F, 10%, 4) + 21000(P/F, 10%, 5)

PW = -16000 + (15000*0.9091) + (21000*0.8264) + (21000*0.7513) + (21000*0.6830) + (21000*0.6209)

PW = -16000 + 13636.5 + 17354.4 + 15777.3 + 14343 + 13038.9

PW = 58150.1

The present worth of the savings due to the reconfiguration is $58,150.1