Question

"A highway contractor is considering buying a new trench excavator that costs $222,000 and can dig a 3-foot-wide trench at the rate of 15 feet per hour. The annual number of feet to dig each year is 5,300. The machine's production rate will remain constant for the first 2 years of the operation and then decrease by 3 feet per hour for each additional year. The maintenance and operating costs will be $72 per hour. The contractor will depreciate the equipment with a five-year MACRS. At the end of 5 years, the excavator can be sold for $84,000. The contractor will earn an additional annual revenue of $112,000 with this new machine. Assuming the contractor's tax rate is 21% per year, determine the net present worth of the cash flow from this machine. The company's MARR is 14%."

Answer 1

	0	1	2	3	4	5	6
MACRS %		20%	32%	19.20%	11.52%	11.52%	5.76%
No. of hours		353.3333	353.3333	441.6667	588.8889	883.3333
Investment	-222,000						12787.2
Salvage						84,000
Revenues		112,000	112,000	112,000	112,000	112,000
Costs		-25,440	-25,440	-31,800	-42,400	-63,600
Depreciation		-44,400	-71,040	-42,624	-25,574	-25,574
EBT		42,160	15,520	37,576	44,026	22,826
Tax (21%)		-8,854	-3,259	-7,891	-9,245	-4,793
Net Income		33,306	12,261	29,685	34,780	18,032
Cash Flows	-222,000	77,706	83,301	72,309	60,355	112,652
NPW	$53,309.98

No. of hours = 5,300 / Rate per hour

Costs = No. of hours x 72

Depreciation = Investment x MACRS %

Cash Flows = Investment + After-tax Salvage Value + Net Income + Depreciation

Net Present Worth can be calculated using NPV function on a calculator or excel or using TVM formulas with 14% discount rate.