Question

A machine that have the following cost is under consideration for a new manufacturing process. The interest rate is 6% compounded semiannually. First cost = $70,000 Semiannual operating cost = 6,000 Semiannual income = 18,000 Salvage value = 9,000 Life in years = 5 years

a. PW = $29,059

b. PW = $19,059

c. PW = -$39,059

d. PW = $39,059

Answer 1

ANSWER:

I = 6% PER YEAR OR 6% / 2 = 3% COMPOUNDED SEMI ANNUALLY

n = 5 years or 10 semi annual years

PW = first cost + semi annual operating cost(p/a,i,n) + semi annual income(p/a,i,n) + salvage value(p/f,i,n)

pw = -70,000 - 6,000(p/a,3%,10) + 18,000(p/a,3%,10) + 9,000(p/f,3%,10)

pw = -70,000 + 12,000(p/a,3%,10) + 9,000(p/f,3%,10)

pw = -70,000 + 12,000 * 8.53 + 9,000 * 0.7441

pw = -70,000 + 102,360 + 6,696.9

pw = 39,056.9

so the correct answer is option d that is pw = $39,059 (the difference of $2.1 is due to decimal places in compounding factor tables and excel)