Question

A machine costs $750,000 to purchase and will produce $250,000 per year revenue. Annual operating and maintenance cost is $70,000. The machine will have to be upgraded in year 4 at a cost of $150,000. The company plans to use the machine for 8 years and then sell it for scrap for which it expects to receive $30,000. The company MARR interest rate is 10%. Compute the net present worth to determine whether or not the machine should be purchased?

Please solve by hand, I am not allowed to use excel.

Answer 1

Annual net benefit ($) = Annual revenue - Annual operating expense = 250,000 - 70,000 = 180,000

Net Present Worth ($) = - 750,000 + 180,000 x P/A(10%, 8) - 150,000 x P/F(10%, 4) + 30,000 x P/F(10%, 8)

= - 750,000 + 180,000 x 5.3349** - 150,000 x 0.6830** + 30,000 x 0.4665**

= - 750,000 + 960,282 - 102,450 + 13,995

= 121,827

**P/A(r%, N) = [1 - (1 + r)^-N] / r

P/A(10%, 8) = [1 - (1.10)^-8] / 0.10 = (1 - 0.4665) / 0.1 = 0.5335 / 0.1 = 5.3349

P/F(r%, N) = (1 + r)^-N

P/F(10%, 4) = (1.1)^-4 = 0.6830

P/F(10%, 8) = (1.1)^-8 = 0.4665