You are in the pizza business and want to buy a new pizza making machine. The ma

Question

You are in the pizza business and want to buy a new pizza making machine. The machine costs $14093 today. At the end of each year you own the machine it will give you returns of $3037after paying for maintenance and repairs.

After you have owned the machine for 6 years you expect to sell it for scrap for $1,000. (You scrap it at the same time you get the last $3037 return.) What is the present value of the RETURNS at

a) 3%?
b) 7%?
c) 11%?

What's the present value of the COST of the machine if the interest rate is:
a) 3%?
b) 7%?
c) 11%?

Explanation / Answer

a. Present Value of Returns:

B. Present Value of Cost

Present Values Year Cash Flows 3% 7% 11% 1 3037 2948.544 2838.318 2736.036 2 3037 2862.664 2652.633 2464.897 3 3037 2779.285 2479.097 2220.628 4 3037 2698.335 2316.913 2000.566 5 3037 2619.743 2165.339 1802.312 6 4037 3380.924 2690.024 2158.345 Total 17289.49 15142.32 13382.78

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