Question

Question-2: A company is considering the purchase of a new machine. The capital investment requirement is $345,000 and the estimated market value of the machine after a six-year study period is $115,000. Annual revenues attributable to the new camera system will be $120,000, whereas additional annual expenses will be $22,000. The corporation's MARR is 20% per year. a) Should the company buy the machine? Answer using AW method. b) You have been asked by management to determine the ROR of this project and to make a recommendation. First check Descartes and Nordstrom's Criterion. Then, solve first by linear interpolation and then by using a spreadsheet.

Answer 1

1. AW = PW(A/P,i%,n)

PW = -345000 + (120000-22000)[1/(1+0.2) + 1/(1+0.2)^2 + 1/(1+0.2)^3 + 1/(1+0.2)^4 + 1/(1+0.2)^5 + 1/(1+0.2)^6] + 115000/(1+0.2)^6

= $19413

AW = 19413*(0.2)*(1.2)^6 /((1.2)^6 - 1) = $ 5837.60

AW>=0 company can consider the new machine.

2. IRR = r

-345000 + (120000-22000)[1/(1+r) + 1/(1+r)^2 + 1/(1+r)^3 + 1/(1+r)^4 + 1/(1+r)^5 + 1/(1+r)^6] + 115000/(1+r)^6 = 0

=> -345000 + (98000/r)*(1-(1+r)^-6) + 115000/(1+r)^6 = 0

=>r = 22.0255%

IRR>MARR