Question

Your firm is thinking about investing $200,000 in the overhaul of a manufacturing cell in a lean environment. Revenues are expected to be $30,000 in year one and then increasing by $10,000 more each year thereafter. Relevant expenses will be $10,000 in year one and will increase by $5,000 per year until the end of the cell’s seven-year life. Salvage recovery at the end of year seven is estimated to be $8,000. What is the annual equivalent worth of the manufacturing cell if the MARR is 10% per year? I got $215,000 and would like to check my answer, thank you.

Answer 1

Investment = 200000

revenues = 30000 in yr 1 and increasing by 10000 every year, we will consider 30000 as annual series and 10000 as gradient series

expenses = 10000 in yr 1 and increasing by 5000 every year, we will consider 10000 as annual series and 5000 as gradient series

t = 7yr

Salvage = 8000

i=10% =0.1

Equivalent annual worth = -200000 *(A/P, 10%,7) + 30000 +10000 * (A/G,10%, 7) - 10000 - 5000 *(A/G, 10%,7) + 8000 *(A/F, 10%,7)

= -200000 * 0.2054055 + 30000 +10000 * 2.621615 - 10000 - 5000 *2.621615 + 8000 *0.1054055

= -41081.1 + 30000 + 26216.15 - 10000 - 13108.07 + 843.244

= -7129.78