ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Question

work on part C

The owner of a Production Company intends to increase the output of his/her firm by purchasing a new piece of machinery, which is anticipated to remain in service for 20 years, and then be sold as scrap. Two potential suppliers are considered, their proposals have the following characteristics: Price ($) Annual Benefits ($/yr) O&M ($/yr) Salvage value ($) Useful Life (yrs) Supplier A 400,000 90,000 20,000 20,000 20 Supplier B 200,000 60,000 7,000 8,000 10 The owner asks you to analyze the two proposals and: A) Assuming the selection criterion is to maximize the NPV: (1)plot the NPV of the two options as a function of interest i for 1% <i<25%, (2) calculate the exact values of interest at which the NPVs of the two options are null, (3)calculate the exact value of interest at which the NPVs of the two options are identical, (4)indicate the ranges of interest in which one option is better than the other. B) Plot the ROI of the two options as a function of interest i for 1%<i<10%; assuming the selection criterion is to obtain an ROI greater than 40%, what is the maximum interest acceptable for each option? C) Disregarding salvage value, and assuming the Company estimates its interest rating at 4.75%, what is the anticipated EUAC for each option?
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Transcribed Image Text:The owner of a Production Company intends to increase the output of his/her firm by purchasing a new piece of machinery, which is anticipated to remain in service for 20 years, and then be sold as scrap. Two potential suppliers are considered, their proposals have the following characteristics: Price ($) Annual Benefits ($/yr) O&M ($/yr) Salvage value ($) Useful Life (yrs) Supplier A 400,000 90,000 20,000 20,000 20 Supplier B 200,000 60,000 7,000 8,000 10 The owner asks you to analyze the two proposals and: A) Assuming the selection criterion is to maximize the NPV: (1)plot the NPV of the two options as a function of interest i for 1% <i<25%, (2) calculate the exact values of interest at which the NPVs of the two options are null, (3)calculate the exact value of interest at which the NPVs of the two options are identical, (4)indicate the ranges of interest in which one option is better than the other. B) Plot the ROI of the two options as a function of interest i for 1%<i<10%; assuming the selection criterion is to obtain an ROI greater than 40%, what is the maximum interest acceptable for each option? C) Disregarding salvage value, and assuming the Company estimates its interest rating at 4.75%, what is the anticipated EUAC for each option?
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