Question

QUESTION 7

1. for th below two machines and based on CC analysis which machine we should select?

   	Machine A	Machine B
   First cost, $	28,321	100,000
   Annual cost, $/year	11,988	7,000
   Salvage value, $	5,755	-
   Life, years	3	infinite

   Answer the below question:

   A- the CC for machine A=

Answer 1

CAPITAIZED COST

convert machine a cashflow in to "A" and then divide by i

we use two formulas

A/P = [ i(i+1)n/(i+1)n -1] -----> capital recovery factor

A/F = i / (1+i)n -1 ------- > sinking fund factor

as i is not given we assumed it as 10%

A1 = - Firstcost *(A/P,10%,3) - Annual cost + salvage value(A/F,10%,3)

= - 28,321* [ i(i+1)n/(i+1)n -1] - 11,988 + 5755*(i / ((1+i)n -1))

= - 28,321* [ 0.10(0.10+1)3/(0.10+1)3 -1] - 11,988 + 5755(*i / (1+0.10)3 -1))

= - 28,321* [ 0.1331/1.331 -1] - 11,988 + 5755*(0.10 / (1.331 -1))

= - 28,321* [ 0.4021] - 11,988 + 5755*(0.3021)

= - 11387.8 - 11988 + 1738.6

= - 21637.2

capitalized cost of machine a = A1 / i

= - 21637.2 / 0.10

= - 216,372.7

capitalized cost of machine b = - 100000 - 7000 / 0.10

= -170,000

machine B is selected as capitalized cost of B is  lower then A