Question

Please draw cash flow digram please

Problem 1 Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 2. The loan interest rate is 8 percent compounded annually. Aerotron Electronics MARR is 10 percent compounded annually. Should Aerotron Electronics buy the water filtration system? 9 Problem 2 The City of Washington is considering adding new buses for its current mass-transit system that links from the Tacoma International Airport to clustering city destinations on non-stop basis. The total investment package is worth $10 million and expected to last 10 years with a salvage value of $850,000. The annual operating and maintenance costs for buses would be $5 million during the first year and will grow by 5% each year over the previous year's O&M costs thereafter. If the system is used for 800,000 trips per year, what would be the fair price to charge per trip? Assume that the City of Washington uses 5% interest rate for any city-sponsored project. Assume the fare will be the same for all destinations.

Answer 1

Answer: Given Information When Aeroton Electronic the purchase a water filtration system then * System costs is S40,000 e Expected lite is years . Salvage value is S7,500 Operating and Maintenance Expenses is S2000 per year Aeroton Electronics required to borrow half of purchase price and required to repay loan after 2 years with three equal annual payments and 8% interest rate compounded annually And when filtration system is not purchased than the Aeroton Electronic are required to pay S12000 per year Cash flow when Aeroton Electronic the purchase a water filtration system $7,500 S4000 $2,000 S2.000 S11052 S11052 S11052 S2,000 $2,000 Cash flow diagram 1 Cash flow when Aeroton Electronic do not purchase a water filtration system $12.000 Cash flow diagram -2

Formula Equivalent annual cost is: EUAC-First Cost(A/P, 0.08, 7)+2000 + 7,500(d/F,8%, 8)+Interest And formula of EMI is (1) EM--XFirst costx(F/P.8%, 2): (d/ P.8%,3) Using equation (2), calculate the EMI as: EM--х First costx(F/P.8%, 2): (d / P. 8903) x 40000x(1.08) 2 .. 0.08(0.08 +1) -x- -- -x 40000 x(1.08)"X 0.388034 -9052.05 Now total interest paid is 9052.05x3-20000 Interest paid- -1022.307

Equivalent Annual cost EUAC-First Cost (A! P, 0.08, 7) +2000 + 7,500(d / F,896,8) + Interest 0.08 40000x +2000 + 7500 х . + 1022.31 (0.08+1) -1 0.08 0.1371 - 40000x 0.1371+2000+7500x - 40000x 0.1371+2000+4376.3676+1022.31 - 5484+2000+4376.3676+1022.31 -12882.67 +1022.31 Since Equivalent annual cost is S12882.67 Since equivalent Annual cost of the purchasing water filtration system is higher than the annual payment to Bay City. Thus, Aeroton Electronic should not purchase a water filtration system.