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

——————————                    —————-     —————–       —————–

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% .

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