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?

Solutions

Expert Solution

Initial Cost of machine = $2,400

Annual revenue = $750

Salvage Value = $50

Life = 5 years

MARR = 18% per year

Present worth of annual revenue is calculated as: [Revenue / (1 + MARR)^^Year]

Present value of salvage after 5 years = [50 / 1.18^⁵] = 21.85

As initial cost is more than present worth of revenue + present worth of salvage, this machine is not worth purchasing.

Rahul Sunny answered 2 years ago

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