Determine if hte investment is economically vaible based on a present worth anal

Question

Determine if hte investment is economically vaible based on a present worth analysis. Draw a cash flow diagram for the problem as well

A $500,000 surface-mount placement machine is being evaluated by a manufacturing engineer at Motorola. The machine is proposed for use on a cell phone production line to automatically insert electronic components onto printed circuit boards. Over a 10-year planning horizon, the engineer estimates the machine will produce annual cost saving of $92,500 and be worth $50,000 at the end of the 10-year period. Based on a 10% APR, should the investment be made? Draw a cash flow diagram (CFD) Is the investment economically viable based on a present worth (PW) analysis?

Explanation / Answer

C1= 92500/ (1+ 0.1)^1 = 92500/1.1

C2= 92500/ (1+ 0.1)^2 = 92500/(1.1^2)

Similarly we have till C9.

For, C10 = 92500/ (1+ 0.1)^10 = 92500/(1.1^10) + 50,000(1.1^10)

If net worth > 0 then the investment must be undertaken.

Now, 92500/1.1 + 92500/(1.1^2) + … + 92500/(1.1^10) = 1143636.364 (using the summation formula for gp)

50,000(1.1^10) = 197277.16

Clearly, net worth > 0 and the project must be undertaken

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