A new equipment has been proposed by engineers to increase the productivity of a

Question

A new equipment has been proposed by engineers to increase the productivity of a certain manual welding operation. The investment cost is $25,000, and the equipment will have a market value of $5,000 at the end of a study period of five years. Increased productivity attributable to the equipment will amount to $10,000 per year after operating costs have been subtracted from the revenue generated by the additional production. If MARR is 10%, is investing in this equipment feasible? Use annual worth method

Explanation / Answer

Present value of investment = Current equipment cost -Present value of market value of equipment

= 25000 - 5000*Present value interest factor (10%,5)

= 25000-5000*0.621 = 25000- 3105 = 21895

Present value of cash flows generated from equipment = 10000*Present value annuity factor(10%,5)

=10000*3.79 = 37900

Net present value from equipment = 37900 - 21895 = 16005

Investment in equipment feasible because net present value is positive.

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