Question

Costs associated with the manufacture of miniature high-sensitivity piezoresistive pressure transducers is $73,000 per year. A clever industrial engineer found that by spending $17,000 now to reconfigure the production line and reprogram two of the robotic arms, the cost will go down to $55,000 next year and $54,000 in years 2 through 5. Using an interest rate of 13% per year, determine the present worth of the savings due to the reconfiguration.

The present worth of the savings is determined to be $  .

i need the answer with steps

Answer 1

Here,

Initial Cost of Production = $73,000

Cost incurred on reconfiguring = $17,000

Year 1 Cost becomes = $55,000

So Savings in Year 1 = $73,000 - $55, 000 = $18,000

Year 2- Year 5 Cost = $54,000

So Savings in Year 2-5 = $19,000

So the Cash Flow Becomes

Year 0	-$17,000
Year 1	$18,000
Year 2	$19,000
Year 3	$19,000
Year 4	$19,000
Year 5	$19,000

Interest Rate/ Discount Rate = 13%

So NPV = -$17,000 + $18,000/(1+.13) + $19,000/ (1+.13)^2 + $19,000/(1+.13)^3+$19,000/(1+.13)^4+$19,000/(1+.13)^5

NPV = $43, 311.89