A company owns a rapid prototyping machine on which it does small contact work f
ID: 1218134 • Letter: A
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:
If the MARR is 10% per year compounded yearly, when should the machine be abandoned?
year 1 2 3 4 5 Net Revenue minus expenses $30K $25K $15K $10K $5K Abandonment value at the end of yr $40K $15K $10K $5K 0Explanation / Answer
Answer:
The current market value of the machine is: $60,000
MARR is: 10%
Life is: 5 years
Net Preset Worth of the Machine:
NPW in 1st year = -60,000 + 30,000(P/A, 10%, 5) + 40,000(A/F, 10%, 5)
= -60,000 + 30,000(3.78) + 40,000(0.16)
= 53,400 + 6,400
= $59,800
NPW in 2nd year = -60,000 + 25,000(P/A, 10%, 5) + 15,000(A/F, 10%, 5)
= -60,000 + 25,000(3.78) + 15,000(0.16)
= 34,500 + 2,400
= $36,900
NPW in 3rd year = -60,000 + 15,000(P/A, 10%, 5) + 10,000(A/F, 10%, 5)
= -60,000 + 15,000(3.78) + 10,000(0.16)
= 56,700 + 1,600
= -$1,700
NPW in 4th year = -60,000 + 10,000(P/A, 10%, 5) + 5,000(A/F, 10%, 5)
= -60,000 + 10,000(3.78) + 5,000(0.16)
= -22,200 + 800
= -$21,400
NPW in 5th year = -60,000 + 5,000(P/A, 10%, 5)
= -60,000 + 5,000(3.78)
= -$41,800
Therefore, the machine is abandoned in second year with Net Present Worth: $36,900.
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