A special-purpose turnkey stamping machine was purchased four years ago for $16,
ID: 2592015 • Letter: A
Question
A special-purpose turnkey stamping machine was purchased four years ago for $16,000. It was estimated at that time that this machine would have a life of 10 years, a salvage value of $2,000, and a removal cost of $900. These estimates are still good. The machine has annual operating costs of $2,700. A new machine that is more efficient will reduce the operating costs to $1400, but it will require an investment of $20,000 plus $1,600 for installation. The life of the new machine is estimated to be 12 years, a salvage of $2,000, and a removal cost of $800. An offer of $4,800 has been made for the old machine, and the purchaser is willing to pay for removal of the machine. Find the ANNUAL EQUIVALENT COST of the preferred alternative (replacing or continuing with the present machine). The firm's interest rate is 12% for any project justification. Ignore the effect of taxes and depreciation.Explanation / Answer
Initial Cash Outflow = Cost of machine + Installation Cost - Sale of old machine
= 20,000 + 1,600 - 4,800
Initial Cash Outflow = 16,800
Annual Operating Cost = $1,400
Useful life = 12 Years
PVAF @12% for 12 Years = 6.194
PVF @12% of 12th year = 0. 257
Cash inflow after 12 years (Salvage value) = 1,200 (2,000 – 800)
PV of Annual operating cost = Annual operating cost * PVAF @12% for 12years
= $1,400*6.194
PV of Annual operating cost = 8,671.6
PV of Salvage value = Salvage value * PVF @12% of 12th year
= 1,200*0. 257
PV of Salvage value = $308.4
PV of Annual operating cost = PV of Annual cost + Initial cash outflow – PV of salvage value
= 8,671.6 + 16,800 – 308.4
PV of Annual operating cost = 25,163.2
Annual Equivalent cost = PV of Annual operating cost / PVAF @12% for 12 Years
= 25,163.2 / 6.194
Annual Equivalent cost = $4,062.51
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.