BAHIR DAR UNIVERSITY

INSTITUTE OF TECHNOLOGY
SCHOOL OF MECHANICAL AND INDUSTRIAL
ENGINEERING
DEPARTMENT OF MECHANICAL ENGINEERING

Industrial Management and Economics

Individual Assignment II

Submitted to: Fentahun G.

Name : Amanuel Asfaw

ID : 0800433
Question - An engineer is considering two materials in order to use for making an
automobile. All estimates are done, (a) which material ought to be chosen on the basis of a
present worth analysis method at an interest rate of 12% per annum? (b) At what initial
purchasing cost for the material which is not selected above will it become more
economically feasible alternative?

Initial
Maintenance
Material Purchasing Cost, Salvage Value, $ Life, Years
Cost Per Year, $
$
X -35,000 -7,000 20,000 5
Y -15,000 -9,000 2,000 5

Question a,

For Material Y,

PWy = -35000 - 7000( ) + 20000( )

PWy = -35000 - 7000( ) + 20000( )

PWy = -35000 - 7000( ) + 20000( )

PWy = -35000 - 7000( ) + 20000( )

PWy = -35000 – 7000*3.603 + 20000*0.5675

PWy = -$48883.43

For Material W,

PWy = -15000 - 9000( ) + 20000( )

PWy = -15000 - 9000( ) + 20000( )

PWy = -15000 - 9000( ) + 20000( )

 PWy = -15000 - 9000( ) + 20000( )

PWy = -15000 – 9000*3.603 + 20000*0.5675

PWy = -$46292

 Therefore, based on the present worth value we choose material W.

Question b,

If PW ≥ 0, the requested MARR is met or exceeded and the alternative is economically valid.

Let C be Initial Cost,

C = -7,000(P/A, 12%, 5) +20,000(P/F, 12%, 5) ≥ 0

C = -7,000(3.605) + 20,000(0.567) = 0

C = $ -13,895

 Hence for Material W the feasible initial purchasing is $ -13,895.