Question

A production engineer bought a heat exchanger whose value is $ 18500 with a useful life period of 10 years, this equipment is expected to produce income from year 1 for $ 3000, increasing by $ 800 per year. It is also known that annual operating costs are $ 350 from year 3. In year 5, maintenance must be done for $ 1500. If the rate of return is 12%, determine the present value of the investment.

Answer 1

CALCULATION OF THE PRESENT VALUE OF THE INVESTMENT
Years	Remarks	Cash Outflow	Cash Inflow	Net Cash Flow	PVF of $ 1 @ 12%	Present Value
0	Cash Outflow	$                -18,500.00	0	$        -18,500.00	1.0000	$                -18,500.00
1	Cash Inflow	$                                 -	3000	$            3,000.00	0.8929	$                    2,678.57
2	Cash Inflow	$                                 -	3800	$            3,800.00	0.7972	$                    3,029.34
3	Cash Inflow + Operating Cost	$                      -350.00	4600	$            4,250.00	0.7118	$                    3,025.07
4	Cash Inflow + Operating Cost	$                      -350.00	5400	$            5,050.00	0.6355	$                    3,209.37
5	Cash Inflow + Operating Cost + Maintenance Cost	$                  -1,850.00	6200	$            4,350.00	0.5674	$                    2,468.31
6	Cash Inflow + Operating Cost	$                      -350.00	7000	$            6,650.00	0.5066	$                    3,369.10
7	Cash Inflow + Operating Cost	$                      -350.00	7800	$            7,450.00	0.4523	$                    3,370.00
8	Cash Inflow + Operating Cost	$                      -350.00	8600	$            8,250.00	0.4039	$                    3,332.04
9	Cash Inflow + Operating Cost	$                      -350.00	9400	$            9,050.00	0.3606	$                    3,263.52
10	Cash Inflow + Operating Cost	$                      -350.00	10200	$            9,850.00	0.3220	$                    3,171.44
				Total		$                  12,416.74
Note: In year 5 there is addittional cash outflow of $ 1500 for maintenance
	Answer = Present Value of the investment =		$                  12,416.74