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The following alternatives are available to fill a given need which are expected to have the expected salvage value at the end of their normal life...
The following alternatives are available to fill a given need which are expected to have the expected salvage value at the end of their normal life of the system.
Attributes Machine A Machine B Machine C
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Estimated First Cost (A) $20000 (B) $60000 (C) $120000
Life Cycle (years) (A) 4 (B) 4 (C) 6
Annual Operating cost (estimate) (A) $35000 (B) $10000 (C) $4000
Estimated interest rate (A) 10% (B) 10% (C) 10%
1). Analyze the sensitivity of the preferred plan due to error in estimating the interest rate.
2). Perform a multi-parameter sensitivity analysis involving the two parameters, Annual cost and First cost. Determine, under what conditions, each alternative should be selected.
NOTE: the values of parameters in this case study are all estimates. Therefore, the real values are higher or lower than those in the table. To answer the questions A and B, assume that we may have committed X % error in estimating the First Cost , y % in estimation the Annual operations cost, and Z% in estimation the interest rate. Therefore, the real value of say, First cost for Machine a is 20000(1 ± X), or the annual operating cost for machine A is $35000(1 ± Y). We know from past experience that, maximum error of estimate (for each of the First Cost and Annual Operating cost) is limited to 50% , and for interest rate it is limited to 30% .
