Ansell. Inc., a medical device manufacturer uses compressed air in solenoids and pressure switches in its machines to control various mechanical movements. Over the years, the manufacturing floor has changed layouts numerous times. With each new layout, more piping was added to the compressed air-delivery system to accommodate new locations of manufacturing machines. None, of the extra, unused old pipe was capped or removed; thus, the current compressed air-delivery system is inefficient and fraught with leaks. Because of leaks, the compressor is expected to run 70% of the time that the plant will be in operation during the upcoming year. This will require 260kWh of electricity at a rate of $0.05/kWh. The plant runs 250 days a year, 24 hours per day.
If Ansell continues to operate the current delivery system, the compressor run time will increase by 7% per year for the next 5 years because of ever-worsening leaks. (After 5 years, the current system will not be able to meet the plant's compressed-air requirement, so it will have to be replaced.)
If Ansell decide to replace all the old piping now, it will cost $28,570. The compressor will still run the same number of days; however, it will run 23% less because of the reduced air pressure loss. If Ansell's interest rate is 12%, is the machine worth fixing now?
Need a cash Flow Diagram and worked out solution