PROBLEM SET NO.

2
ES 321

6. The Anirup Food Processing Company is presently using an outdated

method of filling 25-pound sacks of dry dog food. To compensate for
weighing inaccuracies inherent to this packaging method, the process
engineer at the plant has estimated that each sack is overfilled by 1/9
pound on the average. A better method of packaging is now available
that would eliminate overfilling (and underfilling). The production quota
for the plant is 300,000 sacks per year for the nest six year and a pound
of dog food costs this plant $0.15 to produce. The present system has
no salvage value and will last another four years, and the new method
has an estimated life of four years with a salvage value equal to 10% of
its investment cost, I method. If the MARR is 12% per year for this
company, what amount, I, could be justified for the purchase of the new
plant packaging method?

Cost in using the present method:

 1 lb   $0.15 
Annual “inaccuracy cost” =   300 ,000 sacks     $5 ,000.00
 9 sack   lb 
 1  ( 1  0.12 )4 
PW inaccuracy cost = $5 ,000   $15 ,186.7467
 0.12 
 1  ( 1  0.12 )4 
PW Operation expense = $1,200    $3 ,644.8192
 0.12 

Cost in using new method:

Let I = Initial investment
PW Investment = I  0.1I ( 1.012 )4  0.936448 I

Finding initial investment to justify the purchase of new plant packaging

method:

Total Cost using present method = cost using new method

$15 ,186.7467  $3 ,644.8192  0.936448 I
Solving for I:
I  $20 ,109.57