Question

A company is analyzing a pressing machine to acquire. The purchasing price of this machine is $300,000. This machine will be used towards pressing 1,000 products every 6 months, which each will be sold for $50. Its operating and maintenance cost will be $7000 in the first semi-annual and it increases by $500 every six months (semi-annual) after that till the end of its useful life, which year 7. The salvage value at the end of year 7 will be $20,000. If the interest rate is 7% per year, compounded quarterly, do you recommend the company to purchase this pressing machine? Provide your detailed calculations.

Answer 1

Effective annual rate =( 1+0.07/4)⁴-1 =.07186

		yaer 1
		1st half	2nd half
	production	1000	1000
	sale price per unit	50	50
	sales	50000	50000
less	maintenance cost	7000	7500
less	depriciation	20000	20000
	profit	23000	22500
add	depriciation	20000	20000
	cash flow	43000	42500

since the present value of cash flows is greater than the cost of the machine it is recomended to purchase the machine

the maintenance cost will be increased by 500 for every half year

so the cash flow will be reduced by 500 for every half year, therefore the cash flows for the 7 years will be

year 2 - 1st half -42000 2nd half -41500 cash flow for the year=83500

year 3 - 1st half -41000 2nd half -40500 cash flow for the year=81500

year 4 - 1st half -40000 2nd half -39500 cash flow for the year=79500

year 5 - 1st half -39000 2nd half -38500 cash flow for the year=77500

year 6 - 1st half -38000 2nd half -37500 cash flow for the year=75500

year 7 - 1st half -37000 2nd half -36500 cash flow for the year=73500

year	cash flow	discount @7.186%	discounted cashflows
1	85500	0.9271	79267.05
2	83500	0.8595	71768.25
3	81500	0.7969	64947.35
4	79500	0.7388	58734.6
5	77500	0.685	53087.5
6	75500	0.635	47942.5
7	73500	0.588	43218
		present value	418965.25