A firm is trying to decide which of two weighing scales it should install to check a package-filling operation in the plant. The ideal scale would allow better control of the filling operation, hence less overfilling. If both scales have lives equal to the 6-year analysis period, which one should be selected?
Assume an 8% interest rate.

End-of-Useful-Life Salvage
Value Uniform Annual
Benefit Cost Alternatives

$200 $450 $2000 Atlas scale

700 600 3000 Tom Thumb
scale

Question

A firm is trying to decide which of two weighing scales it should install to check a package-filling operation in the plant. The ideal scale would allow better control of the filling operation, hence less overfilling. If both scales have lives equal to the 6-year analysis period, which one should be selected?
Assume an 8% interest rate.

End-of-Useful-Life Salvage Value	Uniform Annual Benefit	Cost	Alternatives
$200	$450	$2000	Atlas scale
700	600	3000	Tom Thumb scale

Accepted Answer

TABLE SOLUTION

Atlas Scale

PW of brnefits - PW of cost=450(P/A,8%,6)+200(P/F,8%,6)-2000

=450(4.623)+200(0.6302)-2000

=2080+126-2000=$206

Tom Thumb Scale

PW of brnefits - PW of cost=600(P/A,8%,6)+700(P/F,8%,6)-3000

=600(4.623)+700(0.6302)-3000

=2774+441-3000=$206

The salvage value of each scale, it should be noted, is simply treated as another positive cash flow. Because the PWs for the two alternatives are nearly identical, it is likely that there are other tangible or intangible differences that should determine the decision. If there are no such differences, buy the Tom Thumb equipment.

5-BUTTON SOLUTION

H	G	F	E	D	C	B	A
Answer	Solve for	FV	PV	PMT	n	i	Alternative	1
-$2,206	PV	200		450	6	8%	Atlas	2
-2000 total = -H2+E3 $206								3
								4
-$3,215	PV	700		600	6	8%	Tom Thumb	5
-3000 total = -H8+E9 $215								6

In Examples 5–1 and 5–3, we compared two alternatives and selected the one in which present worth of benefits minus present worth of cost was a maximum. The criterion is called the net present worth criterion and written simply as NPW:

Net present worth = Present worth of benefits -Present worth of cost

NPW = PW of benefits -PW of cost (5-1)

The field of engineering economy and this text often use present worth (PW), present value (PV), net present worth (NPW), and net present value (NPV) as synonyms. Sometimes, as in the foregoing definition, net is included to emphasize that both costs and benefits have been considered.

Question 5.3: A firm is trying to decide which of two weighing scales it s...

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