Answer:
The second hand machine should be chosen given that the NPV value is lower than that of the new system
Explanation:
cost of second hand system = $75,000
cost of new system = $150,000
New system can decrease labor hours by 20%
number of useful life ( for both systems ) = 5 years
market value of second hand system after 5 years = $20,000
market value of new system after 5 years = $50,000
Second hand system can operate for 8 hours/day for 20 days = 8*20 = 160 hours per month = 1920 hours per year
labor cost = $40 per hour
MARR = 1% per month
<u> Determine the system that should be recommended</u>
we have to calculate the NPV for both options
for Option 1 ( second hand system )
labor cost = 40 * 1920 = $76800
cost of purchase = $75,000
MARR = 12% p.a.
residual value = $20000
First step : calculate the PV of maintenance cost = $76800× PVAF(12%, 5 years) = $276864
Next : calculate the PV of residual value =$20000× PVF(12%, 5th year)
= $11340
NPV = (75000 + 276864 - 11340 ) = $340,524
for Option 2 ( New Machine )
Labor cost = ( 1920 × 0.8 )hours ×40 = $61440
cost of machine = $150000
Pv of labor cost = 61440×3.605 = $221491.20
Residual value = $50,000
Hence ; PV of residual value = 50000 × 0.567 = $28350
Finally calculate the NPV = (150000+221491.20-28350) = $343,141.20
