Engineering Economic Analysis

....

Future Worth Analysis 273

SOUJTIONi

Semiannual saving $35lcarton x 26 weeks ..$910

Future worth (FW)- A(FjA,,2'l2%, 90) = 910(329.2). .$299,57f

An east coast firm has decided to establish a second plant in Kansas City. There is a factory for

sale for $850,000 that, with extensiveremodeling, could be used. As an alternative,the company

could buy vacant land for $85,000 and have a new plant constructed there. Either way, it will be

3 years before the company will be able to get a plant into production. The timing and cost of the

various components for the factory are given in the following cash flow table.

Year

o

1

Construct NewPlant

Buy land $ 85,000

Design and initial 200,000

construction costs

Balanceof. 1,200,000

construction costs

Setup of production 200,000

equipment

2

3

Remodel Available F~ctory

Purchase factory $850,000

Design and remodeling 250,000

costs

Additional remodeling 250,000

costs

Setup of production 250,000

equipment

If interest is 8%, which alternative results in the lower equivalent cost when th~ ,fiim begins.

production at the end of the third year?

NewPlant

Future worth of cost (FW)- 85,000(Fj P,8%, 3) +200,000(FjA, 8%,3)

• 1,000,OOO(FjP,8%,1)- $1,836,000

Remodel Available Factory

Future worth of cost (FW) .850,OOO(Fj P,8%, 3) +250,000(FjA.,8%, 3)

iii