Question

A machine cost $220,000 to purchase. Fuel, oil, grease, and minor maintenance are estimated to cost $44.00 per operating hour. A set of tires cost $12,000 to replace, and their estimated life is 3100 use hours. A $12,000 major repair will probably be required after 6200 hr of use. The machine is expected to last 9300 hr, after which it will be soild at a price (salvage value) equal to 20% of the original purchase price. A final set of new tires will not be purchased before the sale. How much should the owner of the machine charger per hour of use, if it is expected that the machine will operate 3100 hr per year? The company's cost of capital rate is 8.3%.  

Draw a cash flow diagram for this problem.

Answer 1

Fuel, Oil, Grease and Manitenance cost / hour=A=$44

Repair work will be done once in machines lifetime after 6200 hrs is =$12000

Tires will be replaced thrice in a lifetime of a machine =3*$12000=$36000

Total A=44*9300=$409,200

Total cost=$409200+$36000+$12000=$457200

And Iniital Investment is $220,000

Total Outflow=$679,200

Salvage Value=$44000

Discounting Outflow-SV to get present value\

$635,200/(1.083)^1,077=$582,928

As 9300 hours means 1.077 years

Charge per hour should be atleast $582,928/9300=$62.68=$63