Question

A company is considering the purchase of new equipment. Data concerning the alternative under consideration are presented below.

First Cost: -$26,000
Annual Income: $11,000
Annual Costs: -$6,250
Overhaul at end of Year 3: -$4,830
Salvage Value: $10,500

If the equipment has a life of six years and the company’s minimum attractive rate of return (MARR) is 16%, what is the annual worth of the equipment?

Answer 1

ANSWER:

First cost = -26,000

Annual benefit = Annual income - Annual costs = 11,000 - 6,250 = 4,750

Overhaul cost at the end of year 3 = -4,830

salvage value = 10,500

i = 16%

n = 6 years

Annual worth = First cost(a/p,i,n) + annual benefit + overhaul cost at the end of year 3(a/f,i,n) + salvage value(a/f,i,n)

Aw = -26,000(a/p,16%,6) + 4,750 - 4,830(a/f,16%,3) + 10,500(a/f,16%,6)

Aw = -26,000 * 0.2714 + 4,750 - 4,830 * 0.2853 + 10,500 * 0.1114

Aw = -7,056.4 + 4,750 - 1,377.99 + 1,169.7

Aw = -2,514.69

so the annual worth is -$2,514.69