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By installing a new injection molding machine into its assembly line, plastic molding inc can decrease...

By installing a new injection molding machine into its assembly line, plastic molding inc can decrease its production cost by an estimated 35000 the first year of installment, with an additional decrease of 4000 each year throughout the life of the equipment. It is estimated the new equipment will have a 10 years useful life and a salvage equal to 10% of its initial cost. Use a nominal interest rate of 15% to calculate how much plastic molding inc. can afford to pay for the new machine.

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Expert Solution

Compute the present value (PV) of annual cash flows, using MS-excel as shown below:

The result of the above excel table is as follows:

Hence, the PV of annual cash flows is $107,738.993515.

Let assume the initial value of the new machine be X.

The salvage value of the machine is 0.10X.

Compute the value of the machine, using the equation as shown below:

Machine value = PV of annual cash flows + (Salvage value*PVIF15%, 10 years)

                   X   = $107,738.993515 + (0.10X*0.247184706)

After solving the above-mentioned equation, the initial value of the machine comes out to be $110,469.633913.

jeff jeffy answered 5 months ago
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