Question

A company is considering the purchase of a new turning machine. The company has two options, which are: buying a used machine for SR 13,000 or a new one for SR 17,000. Because the new machine has advanced control features, its operating cost is expected to be SR 7000 per year, while the used machine is expected to cost SR 9000 per year. Each machine is expected to have a 25-year life with a 10% of the purchase price as a salvage value. Assuming an interest rate of 5%, Find the net present worth of the incremental cash flow of the two alternatives (chose the closest answer).

23446.

25236.

26126.

22516.

24306.

Answer #1

Solution :-

Incremental Initial Investment in New Machine = $17,000 - $13,000 = $4,000

Incremental Cost Saving for 25 Years in New Machine = $9,000 - $7,000 = $2,000

Interest Rate Per Year = 5%

Now Net Present Worth =

= - $4,000 + $2,000 * PVAF ( 5% , 25 )

= - $4,000 + ( $2,000 * 14.094 )

= - $4,000 + $28,188

= $24,188

Therefore Correct Answer is (e) that is $24,306 , as it is most closest to answer

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