1 A machine costs $1,000,000 to purchase and will produce $200,000 per year reve

Question

1

A machine costs $1,000,000 to purchase and will produce $200,000 per year revenue. Annual operating and maintenance cost is $60,000. The company plans to use the machine for 10 years and then sell it for scrap for which it expects to receive $20,000. The company interest rate is 10.0%. Compute the net present worth to determine whether or not the machine should be purchased?

2.

By installing a unit of automated packaging equipment, a company can save $50,000 per year in labor. The equipment has a useful life of 10 years and no salvage value. The company uses a MARR of 10.0% per year. What is the maximum the company can pay for the automated packaging equipment now?

3.

A firm purchased some equipment at an initial cost of $50,000. The equipment yielded an annual net saving of $9,000 per year during its 10-year life. At the end of 10 years, the equipment was sold for $10,000. Assuming an interest rate of 10%, did the equipment purchase prove to be desirable? Make your estimates in terms of EUAW.

Explanation / Answer

1 Net Income= 200000-60000 = 140000 per year Present value = 140000(PVAF, 10 Years)+20000(PVAF, 10th year) PV= 140000*6.14+20000*.385 PV = 859600+7300 PV = 866900 The machine should not be purchased as the present value of Cash Inflows is less than the Cash Outflows 2. Maximum amount company can pay PV = 50000(PV , 10years) PV = 50000*6.14=307000 The maximum amount that company can pay for the equipment is $ 307000 3 NPV = 9000*6.14+10000*.385-50000          = 55260+3850-50000        = 9110 As the NPV is positive the equipment purchased is proved to be desirable.

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