Your company is evaluating two alternatives for improving its stitching and packing process.
Option 1 is a fully automated machine with an initial investment of $ 6,000,000 with an annual maintenance cost of $12,000. The machine has a salvage value of $80,000 at the end of 25 years. The cost of producing each part is $10 each.
Option 2 is buying a semi-automated machine with an investment of $3,500,000 with an annual maintenance of $10,000 which is expected to increase by 2% every year. Additionaly you should have to incur a standard labor cost of $60,000 every year. The machine has a salvage value of $58,000 at the end of 25 years. The cost of producing each part is $13 each.
If you expect to sell 40,000 parts every year @ $25 dollars each , Which is a more viable option for the organization if you go by the highest annual equivalent worth. The interest rate is 10% for the company.
Find the Annual Equivalent Worth for Options 1 and 2. Which option should be selected?
Please show all calculations.