Question

A Meat Processing company asked its lead process engineer to evaluate two different types of conveyors for the beef cutting line. Type A has an initial cost of $70,000 and a life of 3 years. Type B has an initial cost of $95,000 and a life expectancy of 6 years. The annual operating cost (AOC) for type A is expected to be $9,000, while AOC for type B is expected to be $7,000. If the salvage values are $5000 and $10,000 for type A and type B respectively, tabulate the incremental cash flow using their LCM (Least Common Multiple) Note:

Answer 1

Repeat the cycle for A two times for having a common Life of 6 years using LCM = 6. In 3rd year of A, AOC is 9000, repurchase of A has additional cost of 70000 and a salvage value of 5000. Incremental cash flows are drawn for B - A. and they are totalled at $57000

	A			B			B-A
End of year	Inflows	Outflows	Net cash flow	Inflows	Outflows	Net cash flow	Incremental cash flows
0		-70000	-70000		-95000	-95000	-25000
1		-9000	-9000		-7000	-7000	2000
2		-9000	-9000		-7000	-7000	2000
3	5000	-79000	-74000		-7000	-7000	67000
4		-9000	-9000		-7000	-7000	2000
5		-9000	-9000		-7000	-7000	2000
6	5000	-9000	-4000	10000	-7000	3000	7000
Total							57000