Question

Flo's Frozen Yogurt shop is evaluating new dispensing machines.

The Flownator has a first cost of $30126 and annual expenses of $9957 that will increase by $569 per year. It will require an overhaul at the end of year 4 at a cost of $5201. The Flownator will save $19547 per year in labor costs. The Flownator has a salvage value of $9942 and a lifespan of 10 years.

The YogGoo300 has a first cost of $24636 and annual expenses of $3568 that will increase by 2% per year. The YogGoo300 will save Flo's $11045 per year in labor costs. The YogGoo300 has a lifespan of 4 years.

What must the salvage value of the YogGoo30 be to make it equally desirable to the Flownator? Use a MARR of 2% to make your calculation.

Answer 1

			ANALYSIS OF CASH FLOWS OF FLOWNATOR
			Present Value(PV) of cash flows
			(Cashflow)/((1+i)^N)
			N=Year of cash flow,i=discount rate=MARR=2%=0.02
				N	A	B	C	D		E=A+B+C+D	PV=E/(1.02^N)
				Year	First Cost	Saving	Annualexpense	OverhaulCost	Terminal cash flow (Salvage)	Net Cash Flow	Present value of Net Cash Flow
				0	($30,126)					($30,126)	-$30,126
				1		$19,547	($9,957)			$9,590	$9,402
				2		$19,547	($10,526)			$9,021	$8,671
				3		$19,547	($11,095)			$8,452	$7,965
				4		$19,547	($11,664)	($5,201)		$2,682	$2,478
				5		$19,547	($12,233)			$7,314	$6,625
				6		$19,547	($12,802)			$6,745	$5,989
				7		$19,547	($13,371)			$6,176	$5,377
				8		$19,547	($13,940)			$5,607	$4,786
				9		$19,547	($14,509)			$5,038	$4,216
				10		$19,547	($15,078)		$9,942	$14,411	$11,822
										SUM	$37,203
		Pv	Net Present Value(NPV)=Sum of PVs	$37,203
		Nper	Number of Years	10
		Rate	Discount Rate	2%
		PMT	Equivalent Annual Cash Flow	$4,142	(Using PMT function of excelwith Rate=2%, Nper=10, Pv=-37203)
			Excel Command : =PMT(2%,10,-37203)