A new piece of equipment is expected to cost $30,000, will require $6,000 per ye

Question

A new piece of equipment is expected to cost $30,000, will require $6,000 per year in maintenance costs, and is expected to save $10,000 per year in labor costs. If the equipment has a salvage value of $5,000 and a lifetime of 10 years, what will the Equivalent Annual Worth (EUAW) be for this unit? Assume your company uses an MARR of 5%. Type in your answer to the nearest $50 using the following format, without decimal places: $XXXX. (i.e. $918.17 type in as:$0900 ) Show your work on your worksheet.

Explanation / Answer

Answer Step-1 Calculate v: v  =   1    1 + Cost of Capital v  =   1    1 + 0.05 v  =   1    1.05 v = 0.9524 Calculate Discount Factor for Item 1: a10|0.05  =   (1 - vAsset Lifetime)    Cost of Capital a10|0.05  =   (1 - 0.952410)    0.05 a10|0.05  =   (1 - 0.6140360472425)    0.05 a10|0.05  =   0.385963953    0.05 a10|0.05 = 7.7193 In Microsoft Excel, this function can be written in a cell as =PV(0.05,10,-1) Calculate Discounted Investment Discounted Investment for Item 1  =   Investment Cost    a10|0.05 Discounted Investment for Item 1  =   $30,000.00    7.7193 Discounted Investment for Item 1 = $3,886.36 Calculate EAC EAC1 = Discounted Investment + Maintenance Cost EAC1 = $3,886.36 + $6,000.00 EAC1 = $9,886.36 Step-2 A B C (A+B+C) Year Cash Flow Maintenance Cost Labour Cost Salvage Value Net Cash Flows 0 -30000 -6000 10000 4000 1 -6000 10000 4000 2 -6000 10000 4000 3 -6000 10000 4000 4 -6000 10000 4000 5 -6000 10000 4000 6 -6000 10000 4000 7 -6000 10000 4000 8 -6000 10000 4000 9 -6000 10000 4000 10 -6000 10000 5000 9000 PW means present Worth PW = $4000(P/F, 5%, 1) + $4000(P/F, 5%, 2) + $4000(P/F, 5%, 3) + $4000(P/F, 5%, 4) + $4000(P/F, 5%, 5) +$4000(P/F, 5%, 6) + $4000(P/F, 5%, 7) + $4000(P/F, 5%, 8) + $4000(P/F, 5%, 9) + $9000(P/F, 5%, 10) PW is $3,956.51 Equivalent Annual Worth:- EUAW = ($9886.36-$3,956.51)          If negative then it is not a wise investment, if positive then good investment EUAW= $ 5929.85 It is a good investment. Type in your answer to the nearest $50 using the following format, without decimal places: $XXXX. (i.e. $918.17 type in as:$0900 ) Show your work on your worksheet. As per Instruction given on problem, that answer make nearest $50. So, according to me the answer is $ 5900.

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