Question

Jimmy Jay is considering buying a house appliance called Toomba, which is an automated robot that vacuums any surface in the house. The initial cost of this superb machine is $1,200. Jimmy Jay estimates that he loses 100 hours every year vacuuming. He predicts that if he had those hours available he could get two hour shifts at his job. He currently gets paid $20 per two hour shift and he expects that value to stay constant. Jimmy gets paid all these extra shifts at the end of the year in a lump sum. He also estimates that the machine will be useful for 5 years and that the operating and maintenance costs will be 250$ per year. He intends to sell this marvelous machine for a salvage value of $50 and will use an interest rate of 5% to analyze if he should buy this machine. Using the net present value approach to determine if Jimmy should purchase the Toomba. What is the NPV?

Answer 1

Cost of cleaner=C=-$1200

Labor revenue per year=LR=(100/2)*20=$1000

O&M Cost per year=O&M=-$250

Salvage of machine=S=$50

Useful life=n=5 years

MARR=i=5%

NPV =C+(LR-O&M)*(P/A,0.05,5)+S*(P/F,0.05,5)

NPV =-1200+(1000-250)*(P/A,0.05,5)+50*(P/F,0.05,5)

Let us calculate the interest factors

(P/F,0.05,5)=1/(1+0.05)^5=0.783526

So,

NPV =-1200+(1000-250)*4.329477+50*0.783526=$2,086.28

NPV is positive, its worth to go for Toomba