Question

A machine which initially costs $14,000 has operating costs of $800 per year. These operating costs include routine maintenance, but additional major overhauls costing $1,600 each are anticipated in years 2, 4, and 6. The machine is sold for its salvage value of $2,400 at the end of year 7. The machine's owners use an interest rate of 8% for their financial analysis. a) Draw the cash flow diagram for this scenario. b) What is the net present value of the cash flow associated with this machine? c) This present value is equivalent to what annual cost to own and operate the machine?

Answer 1

I = 8%

t = 7 yrs

a)CFD

4,000.00 2,000.00 0.00 2,000.00 -4,000.00 -6,000.00 8,000.00 -10,000.00 12,000.00 -14,000.00 16,000.00 6 7 Salvage Major overhual Annual Cost investment

b) NPW = -14000 - 800*(P/A,8%,7) -1600*[ (P/F,8%.2)+(P/F,8%.4)+(P/F,8%.6) ] + 2400*(P/F,8%,7)

= -14000 - 800*5.20637 -1600*[ 0.85733 + 0.73502 + 0.63016 ] + 2400*0.58349

= -20320.74

C) Annual cost = 20320.74 * (A/P,8%,7) = 20320.74 *0.192072 = 3916.21