Question

. A piece of equipment now is use at a plant has a market value of 16,000. This market value is expected to decline by 45% per period (from the previous period) until it reaches zero at the end of period 4. The forecasted operating and repair cost of the equipment for the next period is 35,000 and this is expected to grow at a rate of 10 percent per period. Applying an interest rate of 12%, answer the questions below.

a. What is the period cost of using the equipment just one more period?    

b. What is the lowest period equivalent cost for keeping the equipment in operation for the economic service life?

c. What is the economic service life?   

Answer 1

A B C D F F Period Equivalnt Cost (Using the Product for 1 year) 17 18 Year Cash Inflow Cash Outflow Net cash Flow PVF @ 12% Present Value $ 1 $ 0.8929 23,393.98 19 0 $-8,800.00 $ 35,000.00 $ 26,200.00 20 1 $23,393.98 21 NPV PVAF(12%,1) Equivalent Cost 22 0.8929 23 26,200.00 24 Period Equivalnt Cost (Using the Product for 2 year) 25 26 Year Cash Inflow Cash Outflow Net cash Flow PVF @ 12 % Present Value 1S 27 35,000.00 $ 35,000.00 38,500.00 $ 33,660.00 0.8929 31,251.50 28 1 $ -4,840.00 $ 0.7972 $ 26,833.75 29 2 $58,085.25 30 NPV PVAF(12%,2) 31 1.6901 $ 34,367.94 Equivalent Cost 32 33 Period Equivalnt Cost (Using the Product for 3 year) 34 35 Year Cash Inflow Cash Outflow Net cash Flow PVF @ 12% Present Value $ 1$ 36 0 35,000.00 $ 35,000.00 38,500.00 $ 38,500.00 42,350.00 $ 39,688.00 $ 0.8929 31,251.50 0.7972 $ 37 1 38 2 30,692.20 $-2,662.00 $ 0.7118 28,249.92 39 3 $90,193.62 40 NPV 41 PVAF(12%,3) Equivalent Cost 2.4019 42 37,550.95 43 Period Equivalnt Cost (Using the Product for 4 year) 45 Year Cash Inflow ICash Outflow Net cash Flow PVF @ 12% Present Value 44 $ 1$ 0.8929 31,251.50 46 0 35,000.00 $ 35,000.00 38,500.00 38,500.00 42,350.00 $ 42,350.00 46,585.00 $ 46,585.00 47 1 $ 0.7972 $ 48 2 30,692.20 0.7118 30,144.73 49 $ 0.6355 S 29,604.77 50 4 $ 1,21,693.20 51 NPV PVAF(12%,4) 52 3.0374 Equivalent Cost $40,064.92 53 54 LL co

A B C D E P Period Equivalnt Cost (Using the Product for 1 year) 17 Cash Inflow Net cash Flow PVF @ 12% 18 Year Present Value -D19*E19 Cash Outflow 19 0 0 0 0 1 35000 = ROUND ( E19 /1.12,4) 20 1 -SUM(B20:C20) --16000*0.55 -D20*E20 =SUM(F19:F20) - E20 21 NPV PVAF(12%,1) 22 -F21/F22 Equivalent Cost 23 24 Period Equivalnt Cost (Using the Product for 2 year) Net cash Flow 25 Cash Outflow pVF @ 12% Present Value -D27*E27 26 Year Cash Inflow 27 0 0 0 0 1 -SUM(B28: C28) -SUM(B29: C29) 28 1 =ROUND (E27/1.12,4) = ROUND ( E28 / 1. 12,4) =D28*E28 35000 29 2 C28 1.1 -16000*0.55*0.55 -D29*E29 - SUM (F27:F29) =SUM(E28:E29) 30 NPV PVAF(12%,2) 31 - F30/F31 Equivalent Cost 32 33 Period Equivalnt Cost (Using the Product for 3 year) 34 PVF @ 12% 35 Year Cash Inflow Cash Outflow Net cash Flow Present Value 36 0 0 =D36*E36 0 0 1 = ROUND ( E36 / 1.12,4) -ROUND(E37/1.12,4) = ROUND ( E38 /1.12,4) =SUM(B37:C37) 37 1 =D37*E37 35000 38 2 -C37 1.1 -SUM (B38: C38) -SUM(B39: C39) -D38*E38 -C38*1.1 39 3 -16000*0.55*0.55*0.55 =D39*E39 -SUM (F36:F39 ) =SUM(E37:E39) - F40/F41 40 NPV PVAF(12%,3) 41 Equivalent Cost 42 43 Period Equivalnt Cost (Using the Product for 4 year) Net cash Flow 44 45 Year Cash Inflow Cash Outflow PVF @ 12% Present Value 46 0 =D46*E46 0 0 0 1 =ROUND(E46/1.12,4) =ROUND (E47/1.12,4) =ROUND (E48/1.12,4) -ROUND(E49/1.12,4) 47 1 =SUM(B47:C47) =SUM(B48:C48) -SUM(B49:C49) -SUM(B50:C50) =D47*E47 35000 48 2 49 3 50 4 - C47*1.1 -D48*E48 -D49*E49 -C48*1.1 -D50*E50 -C49*1.1 -SUM (F46: F50) 51 NPV -SUM (E47 : E50) PVAF(12%,4) 52 =F51/F52 Equivalent Cost 53 54

a. The Period Cost for using the equipment for one year = 26200

b. lowest period equivalent cost = $26200 which will arise for using the equipment for 1 year

c. Economic service life is Zero because the company will get positive returns when equipment sold now itself