Answer to Question #261106 in Economics of Enterprise for RAB

Question

Two methods can be used for producing expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $30,000 per year. Method B will have a first cost of $120,000, an operating cost of $8000 per year, and a $40,000 salvage value after its 3-year life. At the MARR of 12% per year, which method should be used on the basis of a present worth analysis? 

Answer 1

We will discount

In this case, the current value of future cash flows is greater than the original and A and B have more. Therefore, it seems to be more profitable. But in order to make decisions, it is also necessary to proceed from other factors: the market situation, the level of taxation, the level of competition in the industry, etc.