Question

1. Star Inc. must purchase a small size milling machine. The following is known about the machine and about possible cash flows. The machine is expected to have a useful life of 8 years. The company has a MARR of 7%. Determine the NPW of the machine. P=.30 P=.40 p=.30 First cost $40,000 $40,000 $40,000 Annual savings 2,000 5,000 8,000 Annual costs 12,000 8,000 6,000 Actual salvage value 4,000 5,000 6,500

Answer 1

The expected first cost of the machine = 0.30 $\times$ $ 40000 + 0.40 $\times$ $ 40,000 + 0.30 $\times$ $ 40,000 = $ 40,000

Expected annual savings = 0.30 $\times$ $ 2000 + 0.40 $\times$ $ 5000 + 0.30 $\times$ $ 8000 = $ 5000

Expected annual cost =  0.30 $\times$ $ 12000 + 0.40 $\times$ $ 8000 + 0.30 $\times$ $ 6000 = $ 8600

Expected salvage value = 0.30 $\times$ $ 4000 + 0.40 $\times$ $ 5000 + 0.30 $\times$ $ 6500 = $ 5150

($5000 - $8600) Net present worth = -$40,000+ (1 +0.07) + -$3600 -$3600 -$3600 -$3600 -$3600 -$3600 -$3600 $5150 + + + + + + + (1 +0.07)2 '(1 +0.07)3' (1 +0.07)+'(1 + 0.07)5'(1 +0.07)6'(1 +0.07) '(1 +0.07)8' (1 +0.07)

NPW of the machine = - $ 58,499.33