Question

Machine A has an initial cost of $19,500 and a salvage value of $7500 (today's value) at the end of its 12 year life.

Machine B has an initial cost of $17,900 and a salvage value of $2300 (today's value) at the end of it's 6 year life.

Inflation is 3.9%                                          

Don’t forget, we will need to increase the costs and salvage values by inflation for any transaction other than year 0.                                             

The company uses a MARR rate of 14%                                            

Benefits for machine A in year 1 are $5,250 and increase by 5.5% per year.                                                         

Benefits for machine B in year 1 are $5,400 and increase by 5.5% per year.                                                         

Costs for each machine start at $800 and increase with the inflation rate

A. Show the Cash flow table for these two machines over the project.                                  

B. What is the NPW, the EUAW and the IRR for both of these machines?

Answer 1

Answer - A

Statement showing Cash flow table of Machine A

Amount ($)

Particulars	Working	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 12
Benefits for Machine	Increase by 5.5% per year	5,250	5,539	5,843	6,165	6,504	6,862	7,239	7,637	8,057	8,500	8,968	9,461
Cost for Machine	Increase by inflation rate of 3.9% per year	-800	-831	-864	-897	-932	-969	-1,006	-1,046	-1,086	-1,129	-1,173	-1,219
Cash Flow		4,450	4,708	4,980	5,267	5,572	5,893	6,232	6,591	6,971	7,371	7,795	8,242

Statement showing Cash flow table of Machine B

Amount ($)

Particulars	Working	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Benefits for Machine	Increase by 5.5% per year	5,400	5,697	6,010	6,341	6,690	7,058
Cost for Machine	Increase by inflation rate of 3.9% per year	-800	-831	-864	-897	-932	-969
Cash Flow		4,600	4,866	5,147	5,444	5,757	6,089

Answer - B

Statement showing NPW of Machine A

Amount ($)

Year	Particulars	Notes / Working	Amount (A)	Discount Factor @ 14% (B)	Present Value     (A * B)
0	Machine cost	Given	-19,500	1	-19,500
1	Cash Flow	Calculated above	4,450	0.8772	3,904
2	Cash Flow	Calculated above	4,708	0.7695	3,622
3	Cash Flow	Calculated above	4,980	0.6750	3,361
4	Cash Flow	Calculated above	5,267	0.5921	3,119
5	Cash Flow	Calculated above	5,572	0.5194	2,894
6	Cash Flow	Calculated above	5,893	0.4556	2,685
7	Cash Flow	Calculated above	6,232	0.3996	2,491
8	Cash Flow	Calculated above	6,591	0.3506	2,311
9	Cash Flow	Calculated above	6,971	0.3075	2,144
10	Cash Flow	Calculated above	7,371	0.2697	1,988
11	Cash Flow	Calculated above	7,795	0.2366	1,844
12	Cash Flow	Calculated above	8,242	0.2076	1,711
12	Salvage value	$7,500 * (1.039)12	11,870	0.2076	2,464
	Net Present Worth	15,036

Statement showing NPW of Machine B

Amount ($)

Year	Particulars	Notes / Working	Amount (A)	Discount Factor @ 14% (B)	Present Value     (A * B)
0	Machine cost	Given	-17,900	1	-17,900
1	Cash Flow	Calculated above	4,600	0.8772	4,035
2	Cash Flow	Calculated above	4,866	0.7695	3,744
3	Cash Flow	Calculated above	5,147	0.6750	3,474
4	Cash Flow	Calculated above	5,444	0.5921	3,223
5	Cash Flow	Calculated above	5,757	0.5194	2,990
6	Cash Flow	Calculated above	6,089	0.4556	2,774
6	Salvage value	$2,300 * (1.039)6	2,893	0.4556	1,318
	Net Present Worth	3,659