The General Mills Company (GMC) purchased a milling machine for $100,000, which

Question

The General Mills Company (GMC) purchased a milling machine for $100,000, which it intends to use for the next five years. This machine is expected to save GMC $38,000 during the first operating year. Then the annual savings are expected to decrease by 4% each subsequent year over the previous year due to increased maintenance costs. Assuming that GMC would operate the machine for an average of 6,000 hours per year and that it would have no appreciable salvage value at the end of the five-year period, determine the equivalent dollar savings per operating hour at 12% interest compounded annually. The equivalent set saving are $ per operating hour.

Explanation / Answer

Answer:Calculation of the equivalent dollar saving per operating hours:

AE (15%) = $27626.06 (A/P, 12%, 5)

       = $27626.06/3.605=$7663.262

Savings per Machine Hour

= $7663.262/6,000

= $1.2772/hr.

Particulars Year P.V.F (12%) Amount ($) PV ($) Machine cost 0 1 -100000 -100000 Saving 1 0.893 38000 33934 2 0.797 36480 29074.56 3 0.712 35021 24934.95 4 0.636 33620.16 21382.42 5 0.567 32275.3536 18300.13 NPV 27626.06

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