Question

The sch of technology, art, and design STAD is considering buying a package machine for its Engineering Technology program. it is expected that this machine will generate a revenue for the school through several projects and partnership with local companies. it is estimated that the net profit in the first year will be $75000 and decreasing at the rate of $10000 for the next five years after that profit stays constant at $7000 until the end of its time life (10 years). if interest rate is 10%, determine the amount of money that the STAD can invest on this machine.
assume there is no salvage value of the machine.
b)determine the equivalent annual for the following cash flow:
year 0-------0
year 1-------$200,000
year 2-------$180,000
year 3-------$160,000
year 4-------$140,000
year 5-------$120,000
year 6-------$100,000
year 7-------$80,000
year8-------$60,000

Answer 1

(a) Amount of money that STAD can invest on this machine = Present value of future benefits expected from this project. = 242,328

Thus it indicates the maximum amount that STAD can invest, but not the actual investment.

Year	CF	DF	PV
1	75000	0.909091	68181.82
2	65000	0.826446	53719.01
3	55000	0.751315	41322.31
4	45000	0.683013	30735.61
5	35000	0.620921	21732.25
6	25000	0.564474	14111.85
7	7000	0.513158	3592.107
8	7000	0.466507	3265.552
9	7000	0.424098	2968.683
10	7000	0.385543	2698.803
	Total Present value		242328

Question - 2

Equivalent annual cash flow = Total present value / PVIFA = =139910.43

Year	CF	DF	PV
1	200000	0.909091	181818.2
2	180000	0.826446	148760.3
3	160000	0.751315	120210.4
4	140000	0.683013	95621.88
5	120000	0.620921	74510.56
6	100000	0.564474	56447.39
7	80000	0.513158	41052.65
8	60000	0.466507	27990.44
	Total	5.334926	746411.8

Equivalent annual cash flow = 746,411.80 / 5.334926 =139910.43

PVIFA = Present value of Interest factor annuity = Total of DF ( Discounting factors column)

Comment for any further clarification ........ all the best