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Calculating NPWs for the given projects

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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%.

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Solution Summary

The solution describes the steps to calculate NPW for each of the given projects. The two alternatives for mutually exclusive analysis are given.

Solution Preview

Please refer attached file for better clarity of tables.

Equipment A
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 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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