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**

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