Final answer:
To determine the best production method, we perform a present worth analysis. Method A has a present worth of -$155,000, while Method B has a present worth of -$104,000. Therefore, Method B should be used.
Step-by-step explanation:
To determine the best production method, we need to compare the present worth of each method. Method A has an initial cost of $80,000 and a salvage value of $15,000 after 3 years. The operating cost is $30,000 per year. Method B has an initial cost of $120,000, a salvage value of $40,000 after 3 years, and an operating cost of $8,000 per year. To perform a present worth analysis, we need to calculate the present worth of the costs and benefits of each method using a 12% interest rate.
Method A:
Initial cost: $80,000
Operating cost for 3 years: $30,000/year x 3 years = $90,000
Salvage value after 3 years: -$15,000 (negative because it's a benefit)
Present worth = -$80,000 - $90,000 + $15,000 = -$155,000
Method B:
Initial cost: $120,000
Operating cost for 3 years: $8,000/year x 3 years = $24,000
Salvage value after 3 years: -$40,000 (negative because it's a benefit)
Present worth = -$120,000 - $24,000 + $40,000 = -$104,000
Based on the present worth analysis, Method B should be used because it has a lower present worth of costs and benefits compared to Method A. The negative present worth values indicate that both methods are expected to result in a loss, but Method B has a smaller loss.