INDE301 – HW #3

Zeina Farhat – 202003311

1. An electric switch manufacturing company has to choose one of three different

assembly methods. Method A will have a first cost of $40,000, an annual operating cost
of $9000, and a service life of 2 years. Method B will cost $80,000 to buy and will have
an annual operating cost of $6000 over its 4-year service life. Method C will cost
$130,000 initially with an annual operating cost of $4000 over its 8-year life. Methods
A and B will have no salvage value, but method C will have some equipment worth an
estimated $12,000 as a salvage value. Which method should be selected? Use present
worth analysis at an interest rate of 10% per year.

PWA= -40,000(1+(P/F,10%,2)+(P/F,10%,4)+(P/F,10%,6)) – 9,000(P/A,10%,8)

PWA=-40,000(1+0.8264+0.6830+0.5645)-9000(5.3349)
PWA= -170,970 $

PWB=-80,000(1+(P/F,10%,4))-6,000(P/A,10%,8)
PWB=-80,000(1+0.6830)-6,000(5.3349)
PWB=-166,649 $

PWC=-130,000-4,000(P/A,10%,8) +12,000(P/F,10%,8)
PWC =-130,000-4,000(5.3349) + 12,000(0.4665)
PWC=-145,742 $

Method C should be selected as it results in the highest present value between the three
methods.

2. Find the capitalized cost of a present cost of $300,000, annual costs of $35,000, and
periodic costs every 5 years of $75,000. Use an interest rate of 12% per year.

𝑖
𝐴 = 𝐹[(1+𝑖)𝑛 −1] meaning A=F(A/F,i,n)
CW=A/i
CC=-300,000-(35,000/0.12)-(75,000(A/F,12%,5)/0.12)
CC=-300,000-291,666.67-(75,000(0.15741)/0.12)
CC=-591,666.67 – 98,381.25
CC=-680,047.92 $

The capitalized cost is approximately -680,048$

3. Chem-Tex Chemical is considering two additives for improving the dry-weather

stability of its low-cost acrylic paint. Additive A has a first cost of $110,000 and an
annual operating cost of $60,000. Additive B has a first cost of $175,000 and an annual
operating cost of $35,000. If the company uses a 3-year recovery period for paint
product sand a MARR of 20% per year, which process is economically favored? Use an
incremental ROR analysis.

Year A B B-A
0 -110,000 -175,000 -65,000
1 -60,000 -35,000 25,000
2 -60,000 -35,000 25,000
3 -60,000 -35,000 25,000
IRR 7.50%

MARR= 20% and 7.50<20

Therefore, the IRR value calculated in the table above is less than MARR.
The process economically favored is the one with lower initial cost meaning we
should select the additive A.