A company is considering investing in a new printing press, and is looking at one of two options. The first printing press has an initial cost of $30,000, a salvage value of $2000, and annual operating costs of $1500 per year. Annual revenues from increased production are estimated to be $7000 per year. The estimated life for this printing press is 8 years. The initial cost of the second printing press is $40,000, its salvage value is $9000, and its annual operating costs are $2000 per year. Its annual benefits are estimated to be $7000 per year. The estimated life for this printing press is 16 years. The company’s MARR is 5%.
a. Manually calculate the NPW (net present worth) for the two product lines, assuming each will be replaced with an identical system at the end of its useful life, and the project life is at least 16 years. Which machine, if any, should be chosen in terms of NPW?
b. Manually calculate payback period for these two machines. Based on these results, which alternative should be chosen?
c. Did your answers for parts a and b concur? Which method would you recommend to make your decision for this analysis? Why?