Two machines can be used to produce a part from titanium. The costs and other cash flows associated with each alternative are estimated. The salvage values are constant regardless of when the machines are replaced. Determine which alternative(s) should be selected for further analysis if alternatives must have a payback of 5 years or less. Perform the analysis with (a) i = 0%, and (b) i = 10% per year.
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(a) i = 0%: Semi-automatic:
n = 40,000/10,000
= 4 years
Automatic:
n = 90,000/15,000
= 6 years
Select only the semi-automatic machine
(b) i = 10%: Semi-automatic:
-40,000 + 10,000(P/A,10%,np) = 0
(P/A,10%,np) = 4.0000
From 10% interest tables, np is between 5 and 6 years.
Therefore, np = 6 years.
Automatic:
-90,000 + 15,000(P/A,10%,np) = 0
(P/A,10%,np) = 6.0000
From 10% interest tables, np is between 9 and 10 years.
Therefore, np = 10 years.
Select neither alternative since np values are both > 5 years
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