A small? high-speed commercial centrifuge has the following net cash flows and a

Question

A small? high-speed commercial centrifuge has the following net cash flows and abandonment values over its useful life. The? firm's MARR is 9?%per year. Determine the optimal time for the centrifuge to be abandoned if its current MV is?$8,500 and it? won't be used for more than five years.

A srna h h spt o crnmorc al con rit ge has the used for more than five yoars. low n net cash o s and abandonment valu s over s useful li Th rms RR s g% por ear. Del rmrt the pli rial tir le r he tert uge o bo abandon d if ils urrent M is $8.500 and it won't be End of Year Annual revenues less expenses S2,000 $200 S2,000 $2,000 S2,000 Abandonment value of machineS6,00 5,100 3 0 Estimated MV $3,8002,100 Click the io n to view the interest and annuity table tor discrete compounding when MARR-9% pe year The centrifuge shouid be retained for yearfs) before abanconment. (Round to the nearest whole number. Type theentfuge should be abandoned inmediately)

Explanation / Answer

Computation of optimal time for the centrifuge to be abandoned -

Note - Cash flow at the end of 1st year = Net cash flow*PVIF(9%,1)+ abandoment value*PVIF(9%,1)

= 2000*0.917 + 6400*0.917

= 7706.42

like this at the end of 2nd year = 2000*PVIFA(9%,2) + 5100**PVIF(9%,2)

= 2000*1.759 + 5100*0.842

= 7810.79

at the end of 3rd year = 2000*PVIFA(9%,3) + 3800*PVIF(9%,3)

= 2000*2.531 + 3800*0.772

= 7996.89

at the end of 4th year = 2000*PVIFA(9%,4) + 2100*PVIF(9%,4)

= 2000*3.24 + 2100*0.708

= 7967

at the end of 5th year -

2000*PVIFA(9%,5) + 0*PVIF(9%,5)

= 2000*3.89

= 7779.30

Conclusion - at the end of 3rd year only cash inflow is highest so the optimal time for the centrifuge to be abandoned is at the end of 3rd year.

Please comment in case of any clarification required.

Year Annual revenue Abandon value Discounting rate @ 9% Cashflow 1 2000 6400 0.9174312 7706.42 2 2000 5100 0.84168 7810.79 3 2000 3800 0.7721835 7996.89 4 2000 2100 0.7084252 7967.13 5 2000 0 0.6499314 7779.30

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