Question

In: Accounting

A machine, costing $32,000 to buy and $2,700 per year to operate. will save mainly labor...

A machine, costing $32,000 to buy and $2,700 per year to operate. will save mainly labor expenses in packing over seven years. The anticipated salvage value of the machine at the end of seven years is $4,500.

(a) if a 12% return on investment (rate of return) is desired, what is the minimum required annual savings in labor from this machine?

(b) The service life us just five years, instead of seven years, what is the minimum required annual savings in labor for the firm to realize a 12% return on investment?

(c) if the annual operating cost increases 10%, say, from $2,500 to $2,750, what will happen to the answer to (a)?

Solutions

Expert Solution

a. Annual Savings is a point at which NPV is zero

NPV = 0

Present Value of cash inflows + Present value of salvage value - Present Value of Cash outflow = 0

X * PVAF ( 12%, 7) + 4500 * PVF(12%,7) - 32000 - 2700 * PVAF(12%,7) = 0

X * PVAF ( 12%, 7) + 4500 * 0.4523 - 32000 - 12322.14 = 0

X * PVAF ( 12%, 7) = $42286.57

X = $42286.57 / 4.5638

Annual Savings = $9265.74

b. Annual Savings is a point at which NPV is zero

NPV = 0

Present Value of cash inflows + Present value of salvage value - Present Value of Cash outflow = 0

X * PVAF ( 12%, 5) + 4500 * PVF(12%,5) - 32000 - 2700 * PVAF (12%,5) = 0

X * PVAF ( 12%, 5) + 4500 * 0.5674 - 32000 - 2700 * 3.6048 = 0

X * PVAF ( 12%, 5) = $39179.47

X = $39179.47 / 3.6048

Annual Savings = $10868.77

c. Annual Savings is a point at which NPV is zero

NPV = 0

Present Value of cash inflows + Present value of salvage value - Present Value of Cash outflow = 0

X * PVAF ( 12%, 7) + 4500 * PVF(12%,7) - 32000 - 2970 * PVAF(12%,7) = 0

X * PVAF ( 12%, 7) + 4500 * 0.4523 - 32000 - 13554.36 = 0

X * PVAF ( 12%, 7) = $43518.79

X = $43518.79 / 4.5638

Annual Savings = $9535.74

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

A machine, costing $30,000 to buy and $2,500 per year to operate, will save mainly labor...
A machine, costing $30,000 to buy and $2,500 per year to operate, will save mainly labor expenses in packaging over seven years. The anticipated salvage value of the machine at the end of seven years is $5,500. 1f a 12% return on investment (rate of return) is desired, what is the minimum required annual savings in labor from this machine? If the service life is just five years, instead of seven years, what is the minimum required annual savings in...
A machine costs $35,000 to buy and $5,000 per year to operate and maintain. It will...
A machine costs $35,000 to buy and $5,000 per year to operate and maintain. It will have a salvage value of $8,000 in 9 years. It will generate $10,000 per year in net revenue for the first four years, and then the revenue will fall by $1,000 each year after. If the company purchasing the machine uses a MARR of 7% to make project , find the NPW, NFW, and AW. Is this project worth undertaking if no loss is...
A machine costs $35,000 to buy and $5,000 per year to operate and maintain. It will...
A machine costs $35,000 to buy and $5,000 per year to operate and maintain. It will have a salvage value of $8,000 in 9 years. It will generate $10,000 per year in net revenue for the first four years, and then the revenue will fall by $1,000 each year after. If the company purchasing the machine uses a MARR of 7% to make project , find the NPW, NFW, and AW. Is this project worth undertaking if no loss is...
You’re trying to save to buy a new $195,000 Ferrari. You have $32,000 today that can...
You’re trying to save to buy a new $195,000 Ferrari. You have $32,000 today that can be invested at your bank. The bank pays 3.9 percent annual interest on its accounts. How long will it be before you have enough to buy the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) length of time _____ years
A new machine will last for ten years. It will save the company $9984 per year...
A new machine will last for ten years. It will save the company $9984 per year and the savings will increase by $2660 each year. What is the present worth of this machine assuming an interest rate of 7.4%/year compounded annually.
A specialized automatic machine costs $100,000 and is expected to save $19,700 per year while in...
A specialized automatic machine costs $100,000 and is expected to save $19,700 per year while in operation. Using a 5 % interest rate, what is the discounted payback period (in years).
A special machine can save $11,200 per year in cash operating expenses for the next 10...
A special machine can save $11,200 per year in cash operating expenses for the next 10 years. The cost is $44,000. No salvage value is expected. Assume the tax rate averages 2/7 of taxable income, straight-line depreciation is used, and the cost of capital = 10% . The CFAT is (round to the nearest dollar): a. $11,200 c. $8,480 b. $9,258 d. $6,800
Assume that you will buy and operate a piece of equipment. The machine costs $25,000. You...
Assume that you will buy and operate a piece of equipment. The machine costs $25,000. You estimate that the equipment will generate $10,000 revenue, each year for six years. You also estimate that operating costs for the machine will be $4,500 each year for six years. These estimates are in constant 2019 dollars. The inflation rate for revenues is estimated to be 3.5%. The inflation rate for operating costs is estimated to be 5.0%.   You will depreciate the machine using...
On January 1, 2020, Blossom Inc. agrees to buy 3 kg of gold at $32,000 per...
On January 1, 2020, Blossom Inc. agrees to buy 3 kg of gold at $32,000 per kilogram from Golden Corp on April 1, 2020, but does not intend to take delivery of the gold. On the day that the contract was entered into, the fair value of this futures contract that trades on the Futures Exchange was zero. On January 1, 2020, Blossom is required to deposit $66 with the stockbroker as a margin. The fair value of the futures...
Starbucks sales about $1 million per store each year, or about $2,700 per store per day....
Starbucks sales about $1 million per store each year, or about $2,700 per store per day. McDonalds sell about $2 million, and Chick-Fil-A sells $4 million (open only 6 days). Assuming each has the same elasticity of demand of approximately 0.75, if each business offers a 5% discount… What will their new store sales be?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT