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Homework answers / question archive / A project engineer is considering a new labelling style that can be produced by two alternative machines
A project engineer is considering a new labelling style that can be produced by two alternative machines. The respective costs and benefits of the machines are given in Table 3. The annual compounded interest rate is 12%. 1) Compute the net present value (NPV) and benefit cost ratio (BCR) of the two projects. [22 Marks) ii) Select the best one using the present value approach. [3 Marks] Table 3 Cash flow Initial cost (RM) Maintenance cost (RM) Annual benefit (RM) Salvage value (RM) Useful life (years) Machine X 125,000 4,000 28,500 16,000 10 Machine Y 115,000 2,500 26,500 13,000 7
NOTE: The problem comprises of two assets having unequal lives, in order to compare the same (if mutually exclusive) we need to use ether LCM method / Repeated projects method or study period method. Since, nowhere both the aspects of mutually exclusiveness and use of any method is mentioned the NPV and BCR are computed directly for the respective useful lives. Maintenance cost is also assumed to be annual.
Machine X
NPV = Present worth of benefits - Present worth of costs
NPV = 28500(P/A,12,10) + 16000(P/F,12,10) – [125000 + 4000(P/A,12,10)]
Using DCIF Tables
NPV = 28500(5.650) + 16000(0.3220) – (125000 + 4000(5.650))
NPV = RM 18577
BCR = Present worth of benefits / Present worth of costs
BCR = [28500(P/A,12,10) + 16000(P/F,12,10)] / [125000 + 4000(P/A,12,10)]
Using DCIF Tables
BCR = 28500(5.650) + 16000(0.3220) / (125000 + 4000(5.650))
BCR = 1.13
Machine Y
NPV = Present worth of benefits - Present worth of costs
NPV = 26500(P/A,12,7) + 13000(P/F,12,7) – [115000 + 2500(P/A,12,7)]
Using DCIF Tables
NPV = 26500(4.564) + 13000(0.4523) – [115000 + 2500(4.564)]
NPV = RM 415.9
BCR = Present worth of benefits / Present worth of costs
BCR = [26500(P/A,12,7) + 13000(P/F,12,7)] – [115000 + 2500(P/A,12,7)]
Using DCIF Tables
BCR = [26500(4.564) + 13000(0.4523)] / [115000 + 2500(4.564)]
BCR = 1.0
Conclusion: Based on the NPV approach Machine X can be chosen over Machine Y since it has higher net present value
