Question

machine X

Initial cost = $100.000

Benefit/year = 20,000 for first 10 years and 10,000 for the next 5 years

life= 15 years

salvage value= 35000

MARR 8%

Zambrota Inc, an Italian company, is considering to facilitate Machine X for their plant in Omaha. The benefit & cost information for Machine X project is shown in Chart 4. The net benefit ( Benefit – Cost ) by using PW method is

Answer 1

To do this we have to calculate the present value of all the benefits, salvage value, and cost.

Present value is the value in the present, of a sum of money, in contrast to some future value it will have when it has been invested at compound interest.

Present value = future value/(1+interest rate)^time

The present value of the benefit in year 1

= 20,000/(1+8%)^1

=$18,518.52

The present value of the benefit in year 2

= 20,000/(1+8%)^2

= $17,146.78

The present value of the benefit in year 3

= 20,000/(1+8%)^3

= $15,876.64

The present value of the benefit in year 4

= 20,000/(1+8%)^4

= $14,700.60

and so on..

This cash flow will change from11th year and the cash flow will be $10000 per year.

The present value of the benefit in year 11

= 10,000/(1+8%)^11

= $4,288.83

The present value of salvage value

= 35,000/(1+8%)^15

= $11,033.46

In table form it looks like this

Year	Cash flow	PV
0	-$100,000	-100,000.00
1	$20,000	$18,518.52
2	$20,000	$17,146.78
3	$20,000	$15,876.64
4	$20,000	$14,700.60
5	$20,000	$13,611.66
6	$20,000	$12,603.39
7	$20,000	$11,669.81
8	$20,000	$10,805.38
9	$20,000	$10,004.98
10	$20,000	$9,263.87
11	$10,000	$4,288.83
12	$10,000	$3,971.14
13	$10,000	$3,676.98
14	$10,000	$3,404.61
15	$10,000	$3,152.42
Salvage value in year 15	$35,000.00	$11,033.46
Total		$163,729.06

The present value of benefits are $163,729.06. the present value of cost is 100,000

Net benefits = $163,729.06 - $100,000

= $63,729.06