1. The HiTek Company is considering purchasing some new equipment. Operating and

Question

1. The HiTek Company is considering purchasing some new equipment. Operating and repair costs will be $15,000 per year for the first 3 years. Beginning in year 4, costs will climb by $2,500 per year. It is anticipated that the equipment will be retired after 10 years. What is the present worth of these costs if the company's MARR is 12%?

2. Northern Machine Tools has a new product ready to be put through final design and into production at a cost of $225,000. The project is being evaluated using an MARR of 12%. Net revenues are projected to be $30,000 for the first year and will increase at 20% per year for 3 years and then increase at 10% per year for the last 6 years of the product life. Should the project development continue?

Explanation / Answer

1) PV of costs = 15000*(1.12^3-1)/(0.12*1.12^3) + 17500*(1.12^7-1)/(0.12*1.12^7) => = 115,893.21 ($) (ANSWER) 2) NPV of Project = -225000+30000*(1.2/1.12)*((1.2/1.12)^3 -1)/((1.2/1.12) - 1) + 30000*(1.1/1.12)*(1-(1.1/1.12)^6)/(1-(1.1/1.2)) =85,288.48 ($) as PV is positive, project is acceptable.

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