A new anti-theft system incorporating MEMS technology is being economically evaluated separately by three engineers at Dragon Technologies. The first cost of the equipment will be $75,000, and the life is estimated at 6 years with a salvage value of $9000. The engineers made different estimates of the net savings that the equipment might generate. Jacob made an estimate of $10,000 per year. Susan states that this is too low and estimates $14,000, while Tyler estimates $18,000 per year. If the before-tax MARR is 8% per year, use PW to determine if these different estimates will change the decision to purchase the equipment. Perform the analysis (a) by hand, and (b) using a spreadsheet.
What will be an ideal response?
(a) By hand:
PWPess = -75,000 + 10,000(P/A,8%,6) + 9000(P/F,8%,6)
= -75,000 + 10,000(4.6229) + 9000(0.6302)
= $-23,099
PWMl = -75,000 + 14,000(P/A,8%,6) + 9000(P/F,8%,6)
= -75,000 + 14,000(4.6229) + 9000(0.6302)
= $-4608
PWOpt = -75,000 + 18,000(P/A,8%,6) + 9000(P/F,8%,6)
= -75,000 + 18,000(4.6229) + 9000(0.6302)
= $13,884
The equipment purchase is justified only under the optimistic estimate of revenue made by Tyler.
(b) Spreadsheet: Same results. Use the PV function to display the PW values.
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