Question

You have purchased a machine costing $25000. The machine will be used for two years, and at the end of this time, its salvage value is expected to be $18000. The machine will be used 6000 hours during the first year and 8000 hours during the second year. The expected annual net savings will be $35000 during the first year and $38000 during the second year. If your interest rate is 8%, what would be the equivalent net savings per machine hour?

Answer 1

EUAW = EUAB - EUAC

Present value of benefits = $ 35,000 ( 1+0.08)¹ + $38,000 ( 1+0.08)²

Present value of benefits = $ 62,414.27

EUAB = $ 62,414.27 (P/A, 8% , 2 years) + $ 18,000 ( A/F, 8% , 2 years)

EUAB =  $ 62,414.27 1.783265 + $ 18,000 x 0.480769

EUAB = $ 43,635.84

EUAW = EUAB - EUAC

EUAC = $ 25,000 ( A/P , 8 % , 2 years)

EUAC = $ 25,000 x 0.560769

EUAC = $ 14,019.225

EUAW =  $ 43,635.84 - $ 14,019.225

EUAW = $ 29,616.62

Equivalent net savings per machine hour =  $ 29,616.62 ( 6000 hours + 8000 hours)

Equivalent net savings per machine hour = $ 2.12