Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 42P

(a):

To determine

Calculate the market value of the machine.

(a):

Expert Solution
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Explanation of Solution

Defender: The annual cost of the defender for first year (ACD1) is $40,000, and it increases (ACDI) by $2,000 per year. The time period (n) is 4 years. The interest rate (i) is 12%.

Challenger: The market value (MVC) is $150,000. The annual value for the first year (ACC1) is $10,000, and it increases (ACI) by $500 per year. The salvage value (SVC) is 50,000. The time period (n1) is 10 years.

The market value of defender (MVD) is calculated as follows:

(MVD(i(1+i)n(1+i)n1)(AC1+ACI(1in(1+i)n11)))=(MVC(i(1+i)n1(1+i)n11)(AC1+ACI(1in(1+i)n11))+SVC(i(1+i)n11))(MVD(0.12(1+0.12)4(1+0.12)41)(40,000+2,000(10.124(1+0.12)41)))=(150,000(0.12(1+0.12)10(1+0.12)101)(10,000+500(10.125(1+0.12)101))+50,000(0.12(1+0.12)101))(MVD(0.32923)(40,000+2,000(1.3589)))=(150,000(0.17698)(10,000+500(3.5847))+50,000(0.05698))(MVD(0.32923)(40,000+2,717.8))=(26,547(10,000+1,792.35)+2,849)MVD(0.32923)=42,717.835,490.35MVD=7,227.450.32923MVD=21,952.59

The market value of the defender is -$21,952.59. The negative sign indicates that the owner of the machine should pay the amount in order to purchase the challenger.

(b):

To determine

Calculate the annual value using spreadsheet.

(b):

Expert Solution
Check Mark

Explanation of Solution

The market value of the defender (MVD) is calculated as follows:

Engineering Economy, Chapter 11, Problem 42P

The market value of the defender is $21,950, which is shown in cell B3. The positive sign indicates that the given amount has to be paid in order to buy machine B.

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