Question
In: Accounting
considering investing in a new piece of equipment that is expected to generate $30,000 of revenue...
considering investing in a new piece of equipment that is expected to generate $30,000 of revenue the first year, increasing 15% per year for the 9 year useful life. The salvage value is expected to be 20% of the initial investment. Using a MARR of 10% and an equivalent worth method, determine the maximum your company should pay for the equipment in order for this to be a satisfactory investment.
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Expert Solution
| At Initial Invest ment @ 300000 | |||
| Cash Inflows | PV Factor @ 10% | Discounted Cash Flows | |
| Year 1 | 30000 | 0.9091 | 27273 |
| Year 2 | 34500 | 0.8264 | 28512 |
| Year 3 | 39675 | 0.7513 | 29808 |
| Year 4 | 45626 | 0.6830 | 31163 |
| Year 5 | 52470 | 0.6209 | 32580 |
| Year 6 | 60341 | 0.5645 | 34061 |
| Year 7 | 69392 | 0.5132 | 35609 |
| Year 8 | 79801 | 0.4665 | 37228 |
| Year 9 | 91771 | 0.4241 | 38920 |
| Year 9 | 60000 | 0.4241 | 25446 |
| NPV of Cash Inflows | 320600 | ||
| Cash Outflow: | 300000 | ||
| NPV | 20600 |
| At Initial Invest ment @ 350000 | |||
| Cash Inflows | PV Factor @ 10% | Discounted Cash Flows | |
| Year 1 | 30000 | 0.9091 | 27273 |
| Year 2 | 34500 | 0.8264 | 28512 |
| Year 3 | 39675 | 0.7513 | 29808 |
| Year 4 | 45626 | 0.6830 | 31163 |
| Year 5 | 52470 | 0.6209 | 32580 |
| Year 6 | 60341 | 0.5645 | 34061 |
| Year 7 | 69392 | 0.5132 | 35609 |
| Year 8 | 79801 | 0.4665 | 37228 |
| Year 9 | 91771 | 0.4241 | 38920 |
| Year 9 | 70000 | 0.4241 | 29687 |
| NPV of Cash Inflows | 324841 | ||
| Cash Outflow: | 350000 | ||
| NPV | -25159 |
| Lets Say Initial Investment is X | |||||
| So, in order to evaluate maximum satisfactory investment to be made | |||||
| where NPV is Zero, means Capital Outflow is equal to Capital Inflow. | |||||
| At that point only, consiedred Satisfactory investment. | |||||
| Case 1 : | 300000 | ||||
| Case 2: | 350000 | ||||
| Details: | NPV @ 300000 | 20600 | |||
| NPV @ 350000 | -25159 | ||||
| Using Expolation and Interpolation method | |||||
| Difference between 300000 - 350000 | 50000 | ||||
| Difference between 20600 - (- 25159 ) | 45759 | ||||
| Hence we are looking for 0 as NPV | |||||
| Hence, 50000 X 20600/ 45759 = 22509.23 | |||||
| Add 22509.23 +300000 | 322509 |
Hence,
| At Initial Invest ment @ 300000 | |||
| Cash Inflows | PV Factor @ 10% | Discounted Cash Flows | |
| Year 1 | 30000 | 0.9091 | 27273 |
| Year 2 | 34500 | 0.8264 | 28512 |
| Year 3 | 39675 | 0.7513 | 29808 |
| Year 4 | 45626 | 0.6830 | 31163 |
| Year 5 | 52470 | 0.6209 | 32580 |
| Year 6 | 60341 | 0.5645 | 34061 |
| Year 7 | 69392 | 0.5132 | 35609 |
| Year 8 | 79801 | 0.4665 | 37228 |
| Year 9 | 91771 | 0.4241 | 38920 |
| Year 9 | 64501.8 | 0.4241 | 27355 |
| NPV of Cash Inflows | 322509 | ||
| Cash Outflow: | 322509 | ||
| NPV | 0 |
From ABove it can be concluded that maximum investment can be made is only 322509, and any investment above that level is not beneficial.
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