Jensen Systems purchases several parts for the instruments it makes via a fixed-price contract of $155,000 per year from a local supplier. The new president of Jensen wants to make the parts in-house through the purchase of equipment that will have a first cost of $240,000 with an estimated salvage value of $30,000 after 5 years. The AOC is difficult to estimate, but company engineers have made optimistic, most likely, and pessimistic estimates of $70,000, $85,000, and $120,000 per year, respectively. Determine if the company should purchase the equipment under any of the operating cost scenarios. The MARR is 20% per year.
What will be an ideal response?
AWcont = $-155,000
AWOpt = -240,000(A/P,20%,5) - 70,000 + 30,000(A/F,20%,5)
= -240,000(0.33438) - 70,000 + 30,000(0.13438)
= $-146,220 (< $-155,000; purchase equipment)
AWML = -240,000(A/P,20%,5) - 85,000 + 30,000(A/F,20%,5)
= -240,000(0.33438) - 85,000 + 30,000(0.13438)
= $-161,220 (> $-155,000; do not purchase equipment)
AWPess = -240,000(A/P,20%,5) - 120,000 + 30,000(A/F,20%,5)
= -240,000(0.33438) - 120,000 + 30,000(0.13438)
= $-196,220 (> $-155,000; do not purchase equipment)
Optimistic estimate favors purchase; most likely and pessimistic estimates do not.
Function: = - PMT(20%,5,-240000,30000) – AOC_estimate will display the correct AW
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