Question

Q12. A company is considering replacing a manufacturing cell at a cost of $90,000. Revenues are expected to be $30,000 per year. Expenses will be $3,500 per year. The useful life of the manufacturing cell is seven years. It will have a salvage value of $10,000 at the end of seven years. The company’s MARR is 12% per year. What is the External Rate of Return (ERR) of this project if ?=????=12% per year?

Answer 1

investment = 90000

AOC = 3500

Annual revenue = 30000

MARR = 12%

t = 7 years

Salvage value = 10000

Present value of investment and AOC (outflows) = -90000 - 3500 *(P/A, 12%, 7)

= -90000 - 3500 * 4.563756

= -105973.148

Future value of Annual revenue & Salvage value (inflows) = 30000*(F/A, 12%,7) + 10000

= 30000*10.089011 + 10000

= 312670.352

Let ERR be r, then

105973.148 * (1+r)^7 = 312670.352

1+r = (312670.352 / 105973.148)^(1/7) = 1.167152

r = 0.167152 = 16.72 %