Question

IPS Corp. will upgrade its package-labeling machinery. It costs $2,250,000 to buy the machinery and have it installed. Operation and maintenance costs, which are $75,000 per year for the first 3 years, increases by $8500 per year for the machine’s 8-year life. The machinery has a salvage value of 10% of its initial cost. Interest is 7.00%. What is the future worth of the machinery? (Note: there are no given benefits to this equipment except that is has a salvage value that is much less than the initial cost. Therefore, the future worth, to be solved for, is a cost.)

Please do it on excel.

Answer 1

Formula	Year (n)	0	1	2	3	4	5	6	7	8
	Initial investment (I)	-22,50,000
Increasing by $8500 p.a. after Year 3	Op. costs (OC)		-75,000	-75,000	-75,000	-83,500	-92,000	-1,00,500	-1,09,000	-1,17,500
10% of initial investment	Salvage Value (S)									2,25,000
(I+OC+S)	Total cash flow (CF)	-22,50,000	-75,000	-75,000	-75,000	-83,500	-92,000	-1,00,500	-1,09,000	1,07,500
(1+7%)^(8-n)	Compounding factor @7%	1.718	1.606	1.501	1.403	1.311	1.225	1.145	1.070	1.000
(CF*Compounding factor)	FV of cash flows	-38,65,918.90	-1,20,433.61	-1,12,554.78	-1,05,191.38	-1,09,451.47	-1,12,703.96	-1,15,062.45	-1,16,630.00	1,07,500.00
Sum of all FVs	Future Worth	-45,50,446.54