A machine that produces a certain piece must be turned off by the operator after each piece is completed. The machine "coasts" for 15 seconds after it is turned off, thus preventing the operator from removing the piece quickly before producing the next piece. An engineer has suggested installing a brake that would reduce the coasting time to 3 seconds.
The machine produces 50,000 pieces a year. The time to produce one piece is 1 minute 45 seconds, excluding coastint time. The operator earns $11 an hour and other direct costs for operating the machine are $3 an hour. The brake will require servicing every 535 hours of operation. It will take the operator 30 minutes to perform the necessary maintenance and will require $57 in parts and material. The brake is expected to last 7,500 hours of operation (with proper maintenance) and will have no salvage value.
How much could be spent for the brake if the Minimum Attractive Rate of Return is 10% compounded annually?
Enter your answer in this format: 1234.56
Hint:
- The question asks for the maximum that you will be willing to pay for the brake. In this case, what are the two alternatives that you are comparing?
- Make sure that you have the correct unit(s) when you calculate the various costs. Note: remember to convert minutes and seconds when you calculate annual cost, maintenance, and brake life.
- How long will the brake last?
- When calculating maintenance cost, labor cost and direct machine operating cost needs to be included as well.
- Maintenance take 30 minutes, this has to be included in maintenance cost calculation too.