Question

Liquid Sleeve, Inc. is a company that makes a sealing solution for machine shaft surfaces that have been compromised by abrasion, high pressures, or inadequate lubrication. The manager is considering adding a metal-based nanoparticle (Type Al or Fe) to its solution to increase the product's performance at high temperatures.

The costs associated with each type are estimated. If the company's MARR is 30% per year, which nanoparticle type should the company select? Utilize an NPV analysis.

Type FE Type Al
First cost, $ -150,000 -280,000
Annual operating cost, $/year -92,000 -74,000
Salvage value, $ 30,000 70,000
Life, years 2 4

Answer 1

Answer:

Liquid Sleeve should select the  Type FE because it has a lower Present Value cost of $257,455.62

Explanation:

The preferred metal-based would be the one with owner a present value  cost.

So we will compute the present value of the the cost the two options.

Type FE =

Initiall cost = -150,000

PV of operating cost = -92,000× (1- (1.3)^(-2))/0.3

                                =  92,000 × 1.360946746

                                  = $(125,207.10)

PV of salvage value = 30,000 × (1.3)^(-3)=  17,751.48

Total PV =  (125,207.10) + (150,000) - 17,751.48 = $(257,455.62 )

Type A1

initial cost = -$280,000

PV of operating cost = 74,000 × (1- (1.3)^(-4))/0.3 =  160,301.81

PV of salvage value = 70,000 × (1.3)^(-4)=    24,508.95

Total Cost = (280,000) + -(160,301.81) + 24,508.95 = $(415,792.86)