A company owns a rapid prototyping machine on which it does small contact work f

Question

A company owns a rapid prototyping machine on which it does small contact work for other companies. The current market value of the machine is $60,000. This machine is expected to provide service for another 5 years. The estimated net revenue minus expenses for the next five years and the abandonment value at the end of each of the five years are given below:

Year                            1                      2                      3                      4                      5

Net Revenue - Expenses $30K               $25K               $15K               $10K               $5K

Abandonment value at end of year $40K               $15K               $10K               $5K                 0

If the MARR is 10% per year compounded yearly, when should the machine be abandoned?

Explanation / Answer

machine should be abandoned when present value of continued operations is less than the present value of abandonment

till the year 2 value of continued operation is greater than value of value of abandonment

at the end of year 3,present value of continued operations=(10/1.1)+(5/1.12)=$13.23K

vlue of abandonment=(10+5)/1.1=$13.6.

so machine should be abandoned at the end of year 3.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.