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Two different methods of solving a production problem are under consideration. Relevant information for both methods are given in TABLE Q3 . The firms MARR

Two different methods of solving a production problem are under consideration. Relevant information for both methods are given in TABLE Q3. The firms MARR is 15%.

TABLE Q3

Costs

Method A

Method B

Initial Costs

52,000

80,000

Annual Operating Costs

17,000

22,000

Annual Revenue

16,000

16,000 + X

Salvage Value

15,000

20,000

Analysis Period (Year)

6

6

MARR

15%

15%

(a) What would be the required additional annual revenue for Method B such that an engineer would be indifferent to choosing one method over the other? Use PW method.

[20 marks]

(b) Plot PW versus uncertainty to show the sensitivity of PW towards the uncertainty of Annual Operating Costs relative to base case for Method A. Assume all other parameters are unchanged. Plot the curve for + 50% uncertainty.

[10 marks]

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