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	$-1,450,000	$-2,550,000
AOC per Year	$-780,000	$-580,000
Salvage Value	$125,000	$130,000
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 = 9% per year.

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

Answer 1

MARR = 9%

Pull system

Initial cost = 1450000

AOC = 780000

Salvage value = 125000

Life = 8 years

Equivalent annual worth = -1450000 *(A/P, 9%,8) -780000 + 125000(A/F,9%,8)

= -1450000 *0.1806743 -780000 + 125000*0.0906743

= -1030643.55

Push System

Initial cost = 2550000

AOC = 580000

Let Salvage value = S

Life = 8 years

Equivalent annual worth = -2550000 *(A/P, 9%,8) -580000 + S*(A/F,9%,8)

= -2550000 *0.1806743 -580000 + S*0.0906743

= -1040719.66 + S*0.0906743

Finding valus of S that will make annual worth of both the options equal, so both options are equally acceptable

-1040719.66 + S*0.0906743 = -1030643.55

S*0.0906743 = 10076.11

S = 111124.15 = 111000 (nearest 1000)