Machine A has an immediate cost of $10,000, and it will earn a net income of $50

Question

Machine A has an immediate cost of $10,000, and it will earn a net income of $5000 per year for a total of 4 years. Machine B has an immediate cost of $25,000, and it will earn a net income of $4400 per year for a total of 12 years. Assume that Machine A can continually be replaced at the end of its useful life with an identical replacement. Neither machine has any salvage value. Enter the annual equivalent worth of the machine that is the best alternative if the interest rate is 13.3%. If neither machine is acceptable, enter 0

Explanation / Answer

Let's calculate the NPV using PV function of both machines and based on which we will calculate annual worth.

For A, N = 4, I/Y = 13.3%, PMT = 5,000, FV = 0 => Compute PV = 14,780.13

=> NPV = 14,780.13 - 10,000 = $4,780.13

For B, N = 12, I/Y = 13.3%, PMT = 4,400, FV = 0 => Compute PV = 25,689.34

=> NPV = 25,689.34 - 25,000 = $689.34

Annual equivalent worth can be calculated using PMT function

For A, N = 4, PV = 4,780.13, FV = 0, I/Y = 13.3% => Compute PMT = $1,617.08

For B, N = 12, PV = 689.34, FV = 0, I/Y = 13.3% => Compute PMT = $118.07

As AW of Machine A is higher than that of Machine B, we select Machine A.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.