Question

ECON

You have purchased a machine costing $26,000. The machine will be used for two years, and at the end of this time, its salvage value is expected to be $18,000. The machine will be used 7,000 hours during the first year and 9,000 hours during the second year. The expected annual net savings will be $36,000 during the first year and $49,000 during the second year. If your interest rate is 14%, what would be the equivalent net savings per machine hour? 3 Click the icon to view the interest factors for discrete compounding when i = 14% per year. The equivalent net savings are $ per machine hour. (Round to the nearest cent.)

Answer 1

R = 14%

Annual equivalent cost = (26000 - 18000*(P/F, 14%, 2))*(A/P, 14%, 2)

Annual equivalent cost = (26000 - 18000*.7695)*.6073

Annual equivalent cost = $7378.09

Annual equivalent benefit = (36000*(P/F, 14%, 1) + 49000*(P/F, 14%, 2))*((A/P, 14%, 2)

Annual equivalent benefit = (36000*.8772 + 49000*.7695)*.6073

Annual equivalent benefit = $42076.6

So,

Annual net benefit = 42076.6 - 7378.09 = $34698.51

Let, equivalent net saving per machine hour = C

Then,

34698.51 = C*(7000*(P/F, 14%, 1) + 9000*(P/F, 14%, 2))*(A/P, 12%, 2)

34698.51= C*(7000*.8772 + 9000*.7695)*.6073

C = 34698.51/((7000*.8772 + 9000*.7695)*.6073)

C = $4.37

So, equivalent net saving per machine hour = $4.37 per machine hour