A window frame manufacturer is searching for ways to improve revenue from its triple-insulated sliding windows, sold primarily in the far northern areas of the United States. Alternative A is an in­crease in TV and radio marketing. A total of $300,000 spent now is expected to increase reve­nue by $60,000 per year. Alternative B requires the same investment for enhancements to the in-plant manufacturing process that will improve the temperature retention properties of the seals around each glass pane. New revenues start slowly for this alternative at an estimated $10,000 the first year, with growth of $15,000 per year as the im­proved product gains reputation among builders. The MARR is 8% per year and the maximum pro­jection period is 10 years for either alternative. Use (a) payback

Question

analysis, and (b) present worth analy­sis (for 10 years) to select the more economical alternative. State the reason(s) for any difference in the alternative chosen between the two analyses. (c) Find the payback and present worth values using a spreadsheet.

What will be an ideal response?

Answer 1

(a) Payback:

A: 0 = -300,000 + 60,000(P/A,8%,np)

(P/A,8%,np) = 5.0000

np is between 6 and 7 years



B: 0 = -300,000 + 10,000(P/A,8%,np) + 15,000(P/G,8%,np)



Try n = 7: 0 > -37,573

Try n = 8: 0 < +24,558



np is between 7 and 8 years



Select A

(b) Present worth:

A: PW = -300,000 + 60,000(P/A,8%,10)

= - 300,000 + 60,000(6.7101)

= $102,606



B: PW = -300,000 + 10,000(P/A,8%,10) + 15,000(P/G,8%,10)

= -300,000 + 10,000(6.7101) + 15,000(25.9768)

= $156,753



Select B



Income for B increases rapidly in later years, which is not accounted for in

payback analysis, which selected A.



(c) A sample spreadsheet solution follows. Answers are:

Payback: Select A with np = 6.6 years

PW: Select B with PWB > PWA