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 14, Problem 56P

(a):

To determine

Calculate annual worth in constant dollar.

(a):

Expert Solution
Check Mark

Explanation of Solution

Machine A: First cost (FC) is $150,000. Maintenance and operating cost (MO) is $70,000. Salvage value (SV) is $40,000. Time period (n) is 5.

Machine B: First cost (FC) is $1,025,000. Maintenance and operating cost (MO) is $5,000. Salvage value (SV) is $2,00,000. Time period (n) is infinitive.

Real return (i) is 12%.

The annual worth of Machine A (AWA) can be calculated as follows:

AWA=FC(i(1+i)n(1+i)n1)MO+SV(i(1+i)n1)=150,000(0.12(1+0.12)5(1+0.12)51)70,000+40,000(0.12(1+0.12)51)=150,000(0.27741)70,000+40,000(0.15741)=41,611.570,000+6,296.4=105,315

The annual worth is -$105,315.

The annual worth of Machine B (AWBA) can be calculated as follows:

AWB=FC×(i)MO=1,025,000(0.12)5,000=123,0005,000=128,000

The annual worth is -$128,000. Since the annual worth of the cost is less for Machine A, select Machine A.

(b):

To determine

Calculate annual worth in current dollars.

(b):

Expert Solution
Check Mark

Explanation of Solution

Inflation adjusted interest rate (if) can be calculated as follows:

if=i+f+i×f=0.12+0.07+0.12×0.07=0.19+0.0084=0.1984

Inflation adjusted interest rate is 19.84%.

The annual worth of machine A (AWA) can be calculated as follows:

AWA=FC(i(1+i)n(1+i)n1)MO+SV(i(1+i)n1)=150,000(0.1984(1+0.1984)5(1+0.1984)51)70,000+40,000(0.12(1+0.1984)51)=150,000(0.3332)70,000+40,000(0.1348)=49,98070,000+5,392=114,588

The annual worth is -$114,588.

The annual worth of Machine B (AWBA) can be calculated as follows:

AWB=FC×(i)MO=1,025,000(0.1984)5,000=203,3605,000=208,360

The annual worth is -$208,360. Since the annual worth of the cost is less for Machine A, select Machine A.

Annual worth can be calculated using the spreadsheet as follows:

Engineering Economy, Chapter 14, Problem 56P

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