Question

(25pts) Sandersen Meat Processors has asked its lead process engineer to evaluate two different types of conveyors for the beef cutting line. Type A has an initial cost of $87422 and a life of 4 years. Type B has an initial cost of $98965 and a life expectancy of 6 years. The annual operating cost (AOC) for type A is expected to be $8774, while the AOC for type B is expected to be $7147. If the salvage values are $5737 and $10950 for type A and type B, respectively, tabulate the incremental cash flow using their Least Common Multiple (LCM).

Answer 1

• LCM of lives = 12 years
• For Type A, in years 4 & year 8, Cash flow = AOC - Salvage value + Initial cost
• For Type A, in year 12, Cash flow = AOC - Salvage value
• For Type B, in year 6, Cash flow = AOC - Salvage value + Initial cost
• For Type B, in year 12, Cash flow = AOC - Salvage value

Incremental cash flow as follows. Since Type B has higher initial cost, we do a (B - A) incremental analysis.

Year	Cash flow, Type A	Cash flow, Type B	Incremental Cash flow, (B - A)
0	-87422	-98965	-11543
1	-8774	-7147	1627
2	-8774	-7147	1627
3	-8774	-7147	1627
4	-90459	-7147	83312
5	-8774	-7147	1627
6	-8774	-95162	-86388
7	-8774	-7147	1627
8	-90459	-7147	83312
9	-8774	-7147	1627
10	-8774	-7147	1627
11	-8774	-7147	1627
12	-3037	3803	6840