Question

You are considering investing RM70000 in new equipment. You estimate that the net cash flows will be RM14000 during the first year, but will increase by RM2500 per year the next year and each year thereafter. The equipment is estimated to have a 11-year service life and a net salvage value of RM4600 at that time. Assume MARR of 8%.

	Answers
a.Calculate the annual capital cost CR (ownership cost) for the equipment.
b.Determine the equivalent annual savings.
c.Is this a wise investment? Y/N.

Answer 1

Initial investment = 70,000

Net Cash flow in the 1^st year = 14,000, increasing by 2,500 each year thereafter

Salvage Value = 4,600

Life = 11 years

MARR = 8%

a. Calculate the annual capital cost CR (ownership cost) for the equipment.

CRC = Initial Cost (A/P, 8%, 11) – Salvage Value (A/F, 8%, 11)

CRC = 70,000 (A/P, 8%, 11) – 4,600 (A/F, 8%, 11)

CRC = 70,000 (0.1401) – 4,600 (0.0601) = 9,530.54 or 9,531

Alternatively CRC can be calculated as

CRC = (I – S) (A/P, 8%, 11) + S*i

CRC = (70,000 – 4,600) (0.1401) + 4,600*0.08 = 9,530.54 or 9,531

b. Determine the equivalent annual savings.        

First convert the gradient net cash flow into uniform cash flow

A = A1 + G (A/G, 8%, 11)

A = 14,000 + 2,500 (4.2395) = 24,598.75 or 24,599

Now calculate equivalent annual savings

EAS = -70,000 (A/P, 8%, 11) + 24,599 + 4,600 (A/F, 8%, 11)

EAS = -70,000 (0.1401) + 24,599 + 4,600 (0.0601)

EAS = 15,068

c. Is this a wise investment? Y/N.

Yes. Investment is a wise investment as the annual savings is greater than zero.