A manufacturing company invests $100,000 in a new piece of equipment. Operating

Question

A manufacturing company invests $100,000 in a new piece of equipment. Operating expenses for this new piece of equipment is estimated to be $4,000 starting EOY 1 and increasing by $200 per year at the EOY2 and for the next 9 additional years. Additional revenues after placing this piece of equipment in service are projected to be $10,000 the first year EOY1 and remaining constant for 4 additional years. After that, additional revenue is expected to increase to $25,000 at EOY6 snf increase at the rate of $300 per year from EOY7 through EOY10. At the end of 10 years the piece of equipment will be sold for $10,000. The nominal rate of interest for all years is 12%. a) Draw a cash flow diagram from the company's perspective. b) What is the present value dollars for all cash flows? (Move all dollars to (time=0) c)What is the uniform series of cash flows for years 1 through 10 that is equivalent to all the cash flows over the ten year period?

Explanation / Answer

2) Present Value of dollars for all cash flows = $64840.91

3) uniform series of cash flows for years 1 through 10 that is equivalent to all the cash flows over the ten year period= $3694.90

3694.90 PMT(12%,10,0,-G17) G17 is the NPV of investment

Year Capital Cost Operating Expense Additiona Revenue Resale Final Cash Flow 0 -100000 -100000 1 -4000 10000 6000 2 -4200 10000 5800 3 -4400 10000 5600 4 -4600 10000 5400 5 -4800 10000 5200 6 -5000 25000 20000 7 -5200 25300 20100 8 -5400 25600 20200 9 -5600 25900 20300 10 -5800 26200 10000 30400 64840.91   NPV(12%,G6:G15) final cash flows for year 1 through 10

3694.90 PMT(12%,10,0,-G17) G17 is the NPV of investment

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