A CNC machine can be replaced with one of two models. The basic model with a lif
ID: 1106064 • Letter: A
Question
A CNC machine can be replaced with one of two models. The basic model with a life of e years Costs $75,000 and is expected to bring in net $22,000 annually. For the deluxe model, the data are 8 years, $120,000, and $40,000 respectively. Assuming /* 8%, calculate the discounted payback period for each project. (25 points) A CNC machine can be replaced with one of two models. The basic model with a life of 8 years costs $75.000 and is expected to bring in net s22,000 annually. For the deluxe model the data are 8 years, S120.000, and $40,000 respectively. If the MARR = 10%. which model is a better choice on the basis of the Pw criterion? (25points)Explanation / Answer
(1st Question)
Discounted Payback Period (DPBP) is the time by when cumulative discounted Cash flow is zero.
Basic Model
Year
Cash Flow ($)
PV Factor @8%
Discounted Cash Flow ($)
Cumulative Discounted Cash Flow ($)
(A)
(B)
(A) x (B)
0
-60,000
1.0000
-60,000
-60,000
1
18,000
0.9259
16,667
-43,333
2
18,000
0.8573
15,432
-27,901
3
18,000
0.7938
14,289
-13,612
4
18,000
0.7350
13,231
-382
5
18,000
0.6806
12,250
11,869
Deluxe Model
Year
Cash Flow ($)
PV Factor @8%
Discounted Cash Flow ($)
Cumulative Discounted Cash Flow ($)
(A)
(B)
(A) x (B)
0
-1,00,000
1.0000
-1,00,000
-1,00,000
1
30,000
0.9259
27,778
-72,222
2
30,000
0.8573
25,720
-46,502
3
30,000
0.7938
23,815
-22,687
4
30,000
0.7350
22,051
-636
5
30,000
0.6806
20,417
19,781
For Basic model, DPBP lies between years 4 & 5.
DPBP = 4 + (Absolute value of cumulative discounted Cash flow, year 4 / Discounted Cash flow, year 5)
= 4 + (382 / 12,250) = 4 + 0.03 = 4.03 years
For Deluxe model, DPBP lies between years 4 & 5.
DPBP = 4 + (Absolute value of cumulative discounted Cash flow, year 4 / Discounted Cash flow, year 5)
= 4 + (636 / 20,417) = 4 + 0.03 = 4.03 years
(4)
PW of both Models is as follows.
Since Deluxe model has higher PW, this is a better choice.
Basic Model
Year
Cash Flow ($)
PV Factor @8%
Discounted Cash Flow ($)
Cumulative Discounted Cash Flow ($)
(A)
(B)
(A) x (B)
0
-60,000
1.0000
-60,000
-60,000
1
18,000
0.9259
16,667
-43,333
2
18,000
0.8573
15,432
-27,901
3
18,000
0.7938
14,289
-13,612
4
18,000
0.7350
13,231
-382
5
18,000
0.6806
12,250
11,869
Deluxe Model
Year
Cash Flow ($)
PV Factor @8%
Discounted Cash Flow ($)
Cumulative Discounted Cash Flow ($)
(A)
(B)
(A) x (B)
0
-1,00,000
1.0000
-1,00,000
-1,00,000
1
30,000
0.9259
27,778
-72,222
2
30,000
0.8573
25,720
-46,502
3
30,000
0.7938
23,815
-22,687
4
30,000
0.7350
22,051
-636
5
30,000
0.6806
20,417
19,781
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