Question

The project management team lead is evaluating a project proposal from their engineering staff. The staff have proposed a capital purchase of a new machine for use. The year zero purchase costs are estimated as $30,000 with an additional (one-time) investment of $8,000 at the end of the second year of operation. Annual operating and maintenance (O&M) costs are estimated as $6,000 per year. Installation of the new machine is expected to provide revenue of $8,000 for the first year, $10,000 for year 2, $12,00 for year 3 and then $14,000 for years 4 through 12. The company currently uses a MARR of 12% for project assessment.

(a) Prepare a Cash flow diagram for this project.

(b) What is the life-span (planning horizon) for this project?

(c) What is the net present value (NPV) for this project?

d) What is annual worth (or cost) for this project?

Answer 1

a) Cash flow diagram of this project

Time	Cash Outflow	Cash inflow
T0	30000 Machine cost	-
T1	6000 Anuual Maint cost	8000
T2	8000 Additional one time investment +6000 Anuual Maint cost	10000
T3	6000 Anuual Maint cost	12000
T4	6000 Anuual Maint cost	14000
T5	6000 Anuual Maint cost	14000
T6	6000 Anuual Maint cost	14000
T7	6000 Anuual Maint cost	14000
T8	6000 Anuual Maint cost	14000
T9	6000 Anuual Maint cost	14000
T10	6000 Anuual Maint cost	14000
T11	6000 Anuual Maint cost	14000
T12	6000 Anuual Maint cost	14000

b) Life Span of this projet.

As it is clearly mentined Cash inflows till year end 12. So life span of this project is 12 years.

c) NPV

Time	Cash Outflow	Cash inflow	Net cash Inflows	PV factor @ 12%	Present Value
T1	6000	8000	2000	0.892857143	1785.714286
T2	14000	10000	-4000	0.797193878	-3188.77551
T3	6000	12000	6000	0.711780248	4270.681487
T4	6000	14000	8000	0.635518078	5084.144627
T5	6000	14000	8000	0.567426856	4539.414846
T6	6000	14000	8000	0.506631121	4053.048969
T7	6000	14000	8000	0.452349215	3618.793723
T8	6000	14000	8000	0.403883228	3231.065824
T9	6000	14000	8000	0.360610025	2884.8802
T10	6000	14000	8000	0.321973237	2575.785893
T11	6000	14000	8000	0.287476104	2299.808833
T12	6000	14000	8000	0.256675093	2053.400744
				6.194374225	33207.96392

NPV = PV of ash inflows - Initial outlay

= 33207.96 - 30000

= 3207.96

d) Annual worth of this Project

= 3207.96 / 6.19437 = 517.88

.

Thers is 1 error seems in the questions as year 3 cash written as 1200 but as seems the structure of question it need to be 12000. So I solved as 12000. But if this is not the case Please comment. I will make change for you.