Question

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 labor for the firm to realize a 10% return on investment?
		If the annual operating cost increases 8%, say, from $3,500 to $3,750, what will happen to the answer to (a)?
		If the annual operating cost increases 8%, say,  from $3,500 to $3,750, what will happen to the answer to (a)?

Answer 1

A. Minimum annual savings (A) if i=12%; n=7 years

A = 30000(A/P,i,n) + 2500 - 5500(A/F,i,n)

A = 30000(A/P,12,7) + 2500 - 5500(A/F,12,7)

Using DCIF tables

A = 30000(0.2191) + 2500 - 5500(0.0991)

A = $8527.95

B. Minimum annual savings (A) if i=10%; n=5 years

A = 30000(A/P,i,n) + 2500 - 5500(A/F,i,n)

A = 30000(A/P,10,5) + 2500 - 5500(A/F,10,5)

Using DCIF tables

A = 30000(0.2638) + 2500 - 5500(0.1638)

A = $9513.1

c. Minimum annual savings (A) if i=12%; n=7 years

A = 30000(A/P,i,n) + 3750 - 5500(A/F,i,n)

A = 30000(A/P,12,7) + 3750 - 5500(A/F,12,7)

Using DCIF tables

A = 30000(0.2191) + 3750 - 5500(0.0991)

A = $9777.95