Two types of equipment are being considered by your company to improve productivity and quality in the manufacturing process. Details for each type of equipment is as follows:
Equipment A: this equipment has an initial investment of $78,000 and the salvage value at the end of the six year service life is estimated to be $20,000. The operating costs are estimated to be $6,500 per year.
Equipment B: this equipment has an initial investment of $45,000 and the salvage value at the end of the six year service life is estimated to be zero. The operating costs are estimated to be $11,500 per year.
The two alternatives are mutually exclusive. Analyze and compare the two pieces of equipment using Net Present Worth and provide your recommendation. The interest rate is 12%.
Please refer attached file for better clarity of tables.
Cost of Equipment=78000
Operating cost per year=6500
Salvage = 20000
Cash flow in Year 6=-6500+20000=13500
Year Cash Flow PW
n Cn Cn/(1+12%)^n
0 -78000 ...
The solution describes the steps to calculate NPW for each of the given projects. The two alternatives for mutually exclusive analysis are given.