5. The Asia Corporation manufactures compressors for commercial airconditioning systems. A
new compressor design is being evaluated as a potential replacement for the most
frequently used unit. The new design involves major changes that have the expected
advantage of better efficiency. From the perspective of a typical user, the new compressor
would have an increased investment of $8,600 relative to the present unit and an annual
expense savings dependent upon the extent to which the design goal is met in actual
operations.
Estimates by the multidisciplinary design team of the new compressor achieving four levels
(percentages) of the efficiency design goal and the probability and annual expense savings
at each level are as follows:
Level (percentage) of
Design Goal Met (%)
90
70
50
30
Probability
P(L)
.25
.40
.25
.10
Annual Expense
Savings
$3,470
2,920
2,310
1,560
Based on a before-tax analysis (MARR =18% per year, analysis period of 6 years, and a
salvage value of zero) and E(PW) as the decision criterion, is the new compressor design
economically preferable to the current unit? 15 pts
