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Deciding Between New Equipment Options

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A refuse recycling operation is considering installing some additional magnetic sorting equipment which will protect the processing equipment from damage. Three alternative systems have been identified, each of which is estimated to save the company $1,200 each year. The lifetime of each alternative is estimated to be 15 years. Alternative A will cost $4,000 to purchase with annual estimated maintenance costs of $700. Alternative B will have an initial cost of $6,000 and annual maintenance of $500. The initial cost of alternative C is $8,000 with $250 annual maintenance. MARR is 8%.

Complete the following statements:
1. The rate of return of Alternative A is:
2. The incremental rate of return for the increment (B-A) is:
3. The incremental rate of return for the increment (C-A) is:

Answer the following questions:
4. Which is the best of the three alternatives A, B or C?
5. Should the company invest in this equipment?

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A refuse recycling operation is considering installing some additional magnetic sorting equipment which will protect the processing equipment from damage. Three alternative systems have been identified, each of which is estimated to save the company $1,200 each year. The lifetime of each alternative is estimated to be 15 years. Alternative A will cost $4,000 to purchase with annual estimated maintenance costs of $700. Alternative B will have an initial cost of $6,000 and annual maintenance of $500. The initial cost of alternative C is $8,000 ...

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The solution discusses deciding between new equipment options.

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Selecting the suitable alternative

A manufacturer is evaluating options regarding his production equipment. He is trying to decide whether he should refurbish his old equipment for $70,000, make major modifications to the production line for $135,000, or purchase new equipment for $230,000. The product sells for $10, but the variable costs to make the product are expected to vary widely, depending on the decision that is to be made regarding the equipment. If the manufacturer refurbishes, the variable costs will be $7.20 per unit. If he modifies or purchases new equipment, the variable costs are expected to be $5.25 and $4.75, respectively.

(a) Which alternative should the manufacturer choose if it the demand is expected to be between 30,000 and 40,000 units?
(b) What will be the manufacturer's profit if the demand is 38,000 units?

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