Question

"A highway contractor is considering buying a new trench excavator that costs $342,000 and can dig a 3-foot-wide trench at the rate of 22 feet per hour. The annual number of feet to dig each year is 6,200. The machine's production rate will remain constant for the first 4 years of the operation and then decrease by 2 feet per hour for each additional year. The maintenance and operating costs will be $61 per hour. The contractor will depreciate the equipment with a five-year MACRS. At the end of 5 years, the excavator can be sold for $63,000. The contractor will earn an additional annual revenue of $107,000 with this new machine. Assuming the contractor's tax rate is 30% per year, determine the net present worth of the cash flow from this machine. The company's MARR is 14%."

Answer 1

Present value for cash flows can be calculated as

PV = FV / (1 + r)ⁿ

Where, FV = Future value of net cash flow, r= Rate of return of discounitng (14%) and n = the no of years

By using the above formula we can calculate present values of cash flows for all the 5 years.