Question

Exercise 6.9: These machine are being considered by a plant manager at Dover Industries Details
for the machine are shown in the table below. Calculate the NPW values for the three machine over
12 years? Inflation needs to be applied to the initial cost and yearly costs
	Machine A	Machine B	Machine C
Initial cost	$125,000	$229,500	$345,000
Life in years	3	6	12
Salvage as % of initial cost	15%	10%	5%
Benefits for 1st year	$55,000	$73,000	$99,000
Costs for 1st year	$12,000	$29,000	$48,000
Inflation rate (for all costs)	4%	p.y.
MARR	12%	p.y.
Benefits increase	6%	p.y.

Answer 1

Cash flow in year 1 for Machine A = $55,000 - $12,000 = $43,000

Cash flow in year 1 for Machine B = $73,000 - $29,000 = $44,000

Cash flow in year 1 for Machine C = $99,000 - $48,000 = $51,000

The cash flow for each succeeding year is calculated by :

cash flow = benefits minus costs

benefits are increased by 6% each year and costs by 4%

At the end of machine life, the salvage value is added to the cash flow for the final year

npv is calculated using the NPV function in Excel with these inputs :

rate = 12% which is the MARR

values = range of cells containing the cash flows

NPV of Machine A = -$1,773

NPV of Machine B = -$5,091

NPV of Machine C = -$92,680