Question

1. Simon is the product manager for Packaging Plus. Simon purchased a new packaging machine for $125,000 to save on labor costs. The first year, the machine worked well and the company was able to save $60,000, with machine operating and maintenance expenses of $25,000. The second year, operating expenses were slightly higher at $28,000, but savings increased to $80,000. The third year, expenses increased again to $30,000, and savings decreased to $65,000. The fourth year, the machine began to experience some problems and broke down quite a bit. Expenses were $40,000 and savings decreased even further to $50,000. The company sold the machine for scrap at the end of year 4 for $5,000.

What is the actual IRR for this purchase?

Calculate your answer to the nearest 0.10. (Hint: If using Excel, format the answer for 2 decimal places.)

Enter your answer as 1.23. Do not use a percent ("%") sign. For example, if you calculate an IRR of 13.54%, enter it as 13.54

2. Using an 8% MARR, calculate the annual worth of the machine.

Enter your answer as 12345

Round your answer. Do not use a dollar sign ("$"), any commas (","), or a decimal point (".")

Answer 1

We need to find net cash flow each year and then use IRR formula in Excel

using excel

A)

Year	Investment	Savings	O&M Cost	Salvage value	Net cash flow
0	-125000				-125000
1		60000	-25000		35000
2		80000	-28000		52000
3		65000	-30000		35000
4		50000	-40000	5000	15000
				IRR	4.25

2) At MARR =8%

We need to find the present value of the Net cash of each year and then use the annuity factor (A/P,8%,4) to convert that present value into uniform series

Year	Investment	Savings	O&M Cost	Salvage value	Net cash flow	Disount factor	Present value
0	-1,25,000.00				-1,25,000.00	1.00	-1,25,000.00
1		60,000.00	-25,000.00		35,000.00	0.93	32,407.41
2		80,000.00	-28,000.00		52,000.00	0.86	44,581.62
3		65,000.00	-30,000.00		35,000.00	0.79	27,784.13
4		50,000.00	-40,000.00	5,000.00	15,000.00	0.74	11,025.45
				IRR	4.25%	Present value	-9,201.40

Annual worth = Present value * (A/P, 8%,4)

= -9,201.40 * 0.301920

= -2778.09

= -2778

Showing formula in excel

Year	Investment	Savings	O&M Cost	Salvage value	Net cash flow	Disount factor	Present value
0	-125000				=B7+C7+D7+E7	=1/(1+0.08)^A7	=F7*G7
1		60000	-25000		=B8+C8+D8+E8	=1/(1+0.08)^A8	=F8*G8
2		80000	-28000		=B9+C9+D9+E9	=1/(1+0.08)^A9	=F9*G9
3		65000	-30000		=B10+C10+D10+E10	=1/(1+0.08)^A10	=F10*G10
4		50000	-40000	5000	=B11+C11+D11+E11	=1/(1+0.08)^A11	=F11*G11
				IRR	=IRR(F7:F11)	Present value	=SUM(H7:H11)