Question

A company is considering a new piece of equipment for a project lasting 10 years with details as shown below. The costs and benefits are expected to keep increasing with the inflation rate even when a new machine is put into operation. Taking these into account, what is the annual worth that the company can expect from the machine?

Initial cost	$145,000
MARR	18%	p y c y
Inflation rate	4%	p y c y
Life	7	years
Project life	10	years
Machine value today with life of 3 years	$64,500
Machine value today with life of 7 years	$33,500
First year costs	$62,200
First year benefits	$96,800

Answer 1

As the cash flow diagram depicts the machine is replaced by a new machine in the year 07, with respective cash flows. Let us now estimate the Annual worth

Net Annual worth = Annual worth of benefits - Annual worth of costs

Net Annual worth = [96800 + 3872(A/G,18,10) + 33500(P/F,18,7)(A/P,18,10) + 64500(A/F,18,10)] – [145000(A/P,18,10) + 145000(P/F,18,7)(A/P,18,10) + 62200 +2488 (A/G,18,10)]

Using DCIF Tables

Net Annual worth = (96800 + 3872(3.194)) + 33500(0.3139)(0.2225) + 64500(0.0425)] – [145000(0.2225) + 145000(0.3139)(0.2225) + (62200 +2488 (3.194))]

Net Annual worth = 114248 – 112536

Net Annual worth = $1712