Question

Flo's Frozen Yogurt shop is evaluating new dispensing machines.

The Flownator has a first cost of $30,008 and annual expenses of $9,865 that will increase by $496 per year. It will require an overhaul at the end of year 5 at a cost of $5,050. The Flownator will save $19,160 per year in labor costs. The Flownator has a salvage value of $9,393 and a lifespan of 10 years.

The YogGoo300 has a first cost of $22,488 and annual expenses of $3,769 that will increase by 6% per year. The YogGoo300 will save Flo's $11,096 per year in labor costs. The YogGoo300 has a lifespan of 4 years.

What must the salvage value of the YogGoo30 be to make it equally desirable to the Flownator? Use a MARR of 6% to make your calculation.

Answer 1

Based on the given data, have prepared the below workings on Projected cash flows for Flownator and YogGoo300;

- Based on the periods of these projects, it is clear that they are not equally comparable interms of their service periods; Flownator is 10 years and YogGoo300 is four years;

- Hence, have projected the cash flows further to see the equal value at a common life (10*2 times) = (4*5 times) = 20 years; Hence, projected cash flows for 20 years;

-Further,once the NPV of Flownator is derived using the discounted cash flow method, have used GOAL SEEK option in Excel to derive the YogGoo300 NPV equal to that of Flownator NPV, by changing the value of salvage value; Based on the below calculations, the Salvage Value of YogGoo300 need to be $23076 for the YogGoo300 to become an economically equally benefitting item as compared to Flownator;