Question

In: Finance

Wheeling-Pittsburgh Steel Company installed a new machine at a cost of $285000. The expected salvage value of this machine was $50000 after 10 years. During this 10 years, the annual revenue was $52000.

Wheeling-Pittsburgh Steel Company installed a new machine at a cost of $285000. The expected salvage value of this machine was $50000 after 10 years. During this 10 years, the annual revenue was $52000.

  1. Did the company recover the investment at 12% per year return?
  2. If the annual operating cost was $10000 the first year and increased constantly by $1000 per year, estimate if the AW was negative or positive at interest of 12% per year? Assume the salvage value of the machine ($ 50000) was realized.

Solutions

Expert Solution

a)

Annual worth of project = -285000*(A/P,0.12,10) + 52000 + 50000*(A/F,0.12,10)

 

Let us calculate the interest factors

 

Annual worth of project = -285000*0.176984 + 52000 + 50000*0.056984 = 4408.76

 

AW is positive. We can say that the company was able to recover the investment at 12% per year return.

 

b)

AW of operating cost = -10000-1000*(P/G,0.12,10)*(A/P,0.12,10)

 

AW of operating cost = -10000-1000*20.254089*0.176984 = -$13584.65

Annual worth of project = 4408.76-13584.65 = -$9175.89

AW of project is negative

a. AW is positive. We can say that the company was able to recover the investment at 12% per year return.

b. AW of project is negative

Umair answered 1 year ago
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