Question
In: Economics
The initial cost of a machine is $2,400. The machine provides an annual revenue of $750....
The
initial cost of a machine is $2,400. The machine provides an annual
revenue of $750. The salvage value of the machine is $50. If the
machine has a life span of 5 years, what is the rate of return on
this machine? Is the machine worth purchasing if the minimum
attractive rate of return (MARR) is 18% per year?
PLEASE HELP. DO NOT USE EXCEL. solve by hand
Solutions
Expert Solution
Initial cost of machine = $2,400
Annual Revenue= $750 with salvage value of $50
Life = 5 years
MARR = 18% (0.18)
Machine is worth purchasing if present value of annual revenue + present value of salvage is more than initial cost, otherwise not.
Present value of annual revenue in year 1 = [750 / (1 + 0.18)^1] = 635.59
Present value of annual revenue in year 1 = [750 / (1 + 0.18)^2] = 538.64
Present value of annual revenue in year 3 = [750 / (1 + 0.18)^3] = 456.47
Present value of annual revenue in year 4 = [750 / (1 + 0.18)^4] = 386.84
Present value of annual revenue in year 5 = [750 / (1 + 0.18)^5] = 327.83
Present value of salvage after year 5 = [50 / (1 + 0.18)^5] = 21.85
Sum of present value of annual revenue + Present value of salvage = 2,345.38 + 21.85 = 2,367.23
As present value of annual revenue and salvage is less than initial cost, machine is not worth purchasing.
Rahul Sunny answered 2 years agoRelated Solutions
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