Question

Two options have been provided by the mechanical engineer to the manager to improve the productivity of the factory. These options are expected to reduce manual tasks by installing new automated machines.

Option1: the first cost is $12,500. The expected annual savings for the first year is $5,000 and it will decrease by $600 for each year thereafter.

Option 2: the initial cost is $9,500. The expected annual savings for the first year is $3,600 and it will decrease by 10 percent each year thereafter.

The expected service life for both machines is 8 years. If the minimum acceptable rate of return of the company is 15%, which alternative should the manager select. Use the present worth comparison method.

Answer 1

Option 2 should be chosen as it has a higher PW compared to Option 1.

answered by: anonymous