QUESTION 1
A new production system for a factory is to be purchased and installed for $132,564. This system will save approximately 300,000 kWh of electric power each year for a 6-year period. Assume the cost of electricity is $0.10 per kWh, and factory MARR is 15% per year, and the salvage value of the system will be $9,792 at year 6. Using the PW method to analyzes if this investment is economically justified
A- calculate the PW of the above investment and insert the result below.
Answer - Present worth of the production system is -$14796.16736 or -$14796.17 ( rounded off ). The investment is not economically justified as the Net present worth of the project is negetive, which means there's more outflow in the investment in comparison to the benefit from it.
Explaination -
Here the negetive sign means cash outflow. The final answer which is the present worth or the net present worth is negetive as well which denotes a net outflow.
The present value of each years cashflow has been arrived by multiplying the respective cashflows with the respective year's Discounting Factor, to arrive at the net present worth.
The yearly saving = total savings in kWh * cost per kWh
= 300000 kWh * $0.10 per kWh
= $30000 savings per year.
Note - The salvage value is a cash inflow just like the yearly savings of $30000, so the salvage value of $9792 received at the end of year 6 has been added with $30000 ( i.e 6th year saving ) arriving at $39792 worth of total savings in year 6.
Rounding off can be adjusted as per the requirement of the solution.
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