Question

An airport needs a modern material handling system for facilitating access to and from a busy maintenance hangar. A​ second-hand system will cost​ $75,000. A new system with improved technology can decrease labor hours by​ 20% compared to the used system. The new system will cost​ $150,000 to purchase and install. Both systems have a useful life of five years. The market value of the used system is expected to be​ $20,000 in five​ years, and the market value of the new system is anticipated to be​ $50,000 in five years. Current maintenance activity will require the used system to be operated eight hours per day for 20 days per month. If labor costs​ $40 per hour and the MARR is​ 1% per​ month, which system should be​ recommended?

Answer 1

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

Determine the system that should be recommended

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