Question

An industrial robot is purchased and installed for $85,000. Annual operating and maintenance costs are expected...

An industrial robot is purchased and installed for $85,000. Annual operating and maintenance costs are expected to be $1,500, with software upgrades increasing by $500 per year from $5,000 in year 1.
If the robot has an eight-year life, what is the present value of the costs of owning it? Assume that the robot has no salvage value.

Assume the annual interest rate is 10%.
Draw a cash flow diagram for the answer and list all of calculation steps and formulas with an explanation sentence.

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Homework Answers

Answer #1

Statement showing present value of the costs of owning it

Particulars 0 1 2 3 4 5 6 7 8 Total PV of owning
Sum of PV
Purchase price of robort 85000
Annual operating and maintenance costs 1500 1500 1500 1500 1500 1500 1500 1500
Software upgrades (WN 1) 5000 5500 6000 6500 7000 7500 8000 8500
Total cost 85000 6500 7000 7500 8000 8500 9000 9500 10000
PVIF @ 10% 1 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665
PV 85000 5909 5785 5635 5464 5278 5080 4875 4665 127691

Thus PV of owning robort = $127691

WN 1) Year wise cost of Software upgrades

Year Software upgrades Calculations
1 5000
2 5500 5000+500
3 6000 5500+500
4 6500 6000+500
5 7000 6500+500
6 7500 7000+500
7 8000 7500+500
8 8500 8000+500

Cash flow diagram

Arrows pointing to the line are cash outflows

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