Question

Hemisphere Electric may purchase equipment to manufacture a new line of wireless devices for home appliance control. The first cost of the equipment will be $74,000, and the life of the equipment is estimated to be 6 years with a salvage value of $10,000. Different people in marketing have provided revenue estimates that the devices will generate. The estimates range from a low of $10,000 to a high of $20,000, with an average of $16,000 per year. If the MARR is 7% per year, use PW to determine if these different estimates will change the decision to purchase the equipment. The present worth of low estimate range is $ . The present worth of average estimate range is $ O . The present worth of high estimate range is $ D . The $10,000 revenue estimate (Click to select) 9 the purchase. The $16,000 revenue estimate (Click to select) A the purchase. The $20,000 revenue estimate (Click to select the purchase.

Answer 1

Using NPV function of Excel, present worth of revenue estimated and salvage value with the MARR of 7% is assessed as follows:

Present worth  of Low estimate range=$54,328.82

Present worth of average estimate= $82,928.06

Present worth of high estimate range= $101,994.22

The $10,000 revenue estimate gives a net present worth of -$19,671.18 (negative) after deducting initial cost. Hence the decision to purchase the equipment is reversed

The $16,000 revenue estimate gives a net positive value of $8,928.06 and hence the decision is not changed

The $20,000 revenue estimate gives a net positive value of $27,994.22 and hence the decision is not changed

Screen shot of calculation in Excel is appended below:

C10 A 1 Year fx=NPV(7%,C4,C5,C6,27,28,29) C Cash Flow Lowest Average High 1 Revenue estimated 2 Revenue estimated 3 Revenue estimated 4 Revenue estimated 5 Revenue estimated 6 Revenue estimated plus salvage value nue estimated plus salvage value Present Worth of above cash flows Less first cost in year 0 Net presnt worth $10,000 $10,000 $10,000 $10,000 $10,000 $20,000 $54,328.82 $74,000 ($19,671.18) $16,000 $16,000 $16,000 $16,000 $16,000 $26,000 $82,928.06 $74,000 $8,928.06 $20,000 $20,000 $20,000 $20,000 $20,000 $30,000 $101,994.22 $74,000 $27,994.22