Question

Consider a machine that has an initial cost of $126,000 and an estimated salvage value of $27,000. After some analysis we conclude that this machine will have O&M costs of $1,850 per year but based on the faulty nature of this machine we will have to incur in major maintenance costs at the end of year 3 and 6. During year 3 we expect to pay $14,000 and for year we estimate a $16,500. The machine will have a useful life of 8 years and we will use an interest rate of 6%. Use annual cash flow analysis.

Answer 1

Present worth of the cash flow = 126,000 + 1,850(P/A, 6%, 8) + 14,000(P/F, 6%, 3) + 16,500(P/F, 6%, 6)

                                                  = 126,000 + 1,850(4.917) + 14,000(0.8396) + 16,500(0.7050)

                                                  = 126,000 + 9,096.45 + 11,754.4 + 11,632.5

                                                  = 158,483.35

Annual equivalent cost of the project = PW(A/P, i, n)

                                                           = 158,483.35(A/P, 6%, 8)

                                                           = 158,483.35(0.1610)

                                                            = $25,515.82

Thus, Annual equivalent cost of the project is $25,515.82.